QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-9601

K-V PHARMACEUTICAL COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Delaware

43-0618919

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2280 Schuetz Road, St. Louis, MO 63146

(Address of Principal Executive Offices) (ZIP code)

(314) 645-6600

(Registrants Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)

Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

¨

Accelerated filer

x

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x

As of February 28, 2011, the registrant had outstanding 48,530,442 and 11,280,285 shares of Class A and Class B Common Stock, respectively, exclusive of treasury shares.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (the Report) amends our Quarterly Report on Form 10-Q for the three and nine months ended December 31, 2010 that we filed on March 31,
2011 (the Original Form 10-Q).

Restatement of Consolidated Financial Statements (the Restatement)

The Company issued warrants to purchase shares of its Class A Common Stock in November 2010 and March 2011 as described in Note
1Description of Business to the Notes to Consolidated Financial Statements (Note 1) in this Report (the Warrants), to its lenders in connection with certain financing transactions.

The Company originally classified the Warrants as equity instruments from their respective issuance dates until the March 17, 2011
amendment of the Warrant provisions which added a contingency feature and an escrow requirement as described in Note 12. At that date, the Warrants were revalued and reclassified from equity to liabilities. The Company also had originally
used a Black-Scholes option valuation model to determine the value of the Warrants. Upon a re-examination of the provisions of the Warrants, the Company determined that the non-standard anti-dilution provisions contained in the Warrants require
that (a) the Warrants all be treated as liabilities from their respective issuance dates and (b) their value should be calculated utilizing a valuation model which considers the mandatory conversion features of the Warrants and the
possibility that the Company may issue additional common shares or common share equivalents that, in turn, could result in a change to the number of shares issuable upon exercise of the Warrants and the related exercise price. As a result, the
Company has revalued the Warrants from their respective dates of issuance using a Monte Carlo simulation model.

As a result
of the foregoing, on November 7, 2011, the Audit Committee of our Board of Directors, upon recommendation from management, determined that the previously issued consolidated financial statements included in our Original Form 10-K and in our
Quarterly Reports on Form 10-Q for the quarters ended December 31, 2010 and June 30, 2011 should not be relied upon. The restatements did not change the Companys reported cash and cash equivalents, operating expenses, operating
losses or cash flows from operations for any period or date. This Report on form 10-Q/A contains the restated financial statements as of and for the three and nine months ended December 31,2010.

This Report does not reflect events occurring after the filing of the Original Form 10-Q and does not revise or update disclosure affected by subsequent
events. In addition, forward-looking statements made in the Original Form 10-Q have not been revised to reflect the passage of time, events, results or developments that occurred or facts that became known to us after the Original Form 10-Q,
and such forward-looking statements should be read in their historical context and in the context of our subsequent reports filed with the SEC.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains
various forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 (the PSLRA) and which may be based on or include assumptions concerning our operations, future results and
prospects. Such statements may be identified by the use of words like plan, expect, aim, believe, project, anticipate, commit, intend,
estimate, will, should, could, potential and other expressions that indicate future events and trends.

All statements that address expectations or projections about the future, including, without limitation, statements about product launches, governmental and regulatory actions and proceedings, market
position, revenues, expenditures and the impact of the recall and suspension of shipments on revenues, and other financial results, are forward-looking statements.

2

All forward-looking statements are based on current expectations and are subject to risk
and uncertainties. In connection with the PSLRAs safe harbor provisions, we provide the following cautionary statements identifying important economic, competitive, political, regulatory and technological factors, among others,
that could cause actual results or events to differ materially from those set forth or implied by the forward-looking statements and related assumptions. Such factors include (but are not limited to) the following:

(1)

our ability to continue as a going concern, as discussed in Note 3Going Concern and Liquidity Considerations in the Notes to the Consolidated
Financial Statements included in Part I of this Report;

(2)

risks associated with the introduction and growth strategy related to the Companys Makena® product, including:

(a)

the impact of competitive, commercial payor, governmental (including Medicaid program), physician, patient, public or political responses and reactions, and responses
and reactions by medical professional associations and advocacy groups, on the Companys sales, marketing, product pricing, product access and strategic efforts;

(b)

the possibility that the benefit of any period of exclusivity resulting from the designation of
Makena® as an orphan drug may not be realized as a result of the FDAs decision to decline to take
enforcement action with regards to compounded alternatives;

(c)

the Center for Medicare and Medicaid Services (CMS) policy regarding Medicaid reimbursement for Makena®, and the resulting coverage decisions for Makena® by various state Medicaid and commercial payors;

(d)

the satisfaction or waiver of the terms and conditions for our continued ownership of the full U.S. and worldwide rights to Makena® set forth in the previously disclosed Makena® acquisition agreement, as amended; and

(e)

the number of preterm births for which Makena® may be prescribed and its safety profile and side effects profile and acceptance of the degree of patient access to and pricing;

(3)

the possibility of delay or inability to obtain U.S. Food and Drug Administration (the FDA) approvals of Clindesse and Gynazole-1 and the possibility that
any product relaunch may be delayed or unsuccessful;

(4)

risks related to compliance with various agreements and settlements with governmental entities which are discussed in Item 2Managements
Discussion and Analysis of Financial Condition and Results of OperationsDiscontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree in this Report, including:

(a)

the consent decree between the Company and the FDA and the Companys suspension in 2008 and 2009 of the production and shipment and the nationwide recall of all of
the products that it formerly manufactured, as well as the related material adverse effect on our revenue, assets and liquidity and capital resources;

(b)

the agreement between the Company and the Office of Inspector General of the U.S. Department of Health and Human Services (HHS OIG) to resolve the risk of
potential exclusion of the Company from participation in federal healthcare programs; and

(c)

our ability to comply with the plea agreement between a now-dissolved subsidiary of the Company and the U.S. Department of Justice;

(5)

the availability of raw materials and/or products manufactured for the Company under contract manufacturing agreements with third parties;

(6)

risks that the Company may not ultimately prevail in or that insurance proceeds will be insufficient to cover potential losses that may arise from litigation discussed
in Note 16Commitments and ContingenciesLitigation and Governmental Inquiries of the Notes to the Consolidated Financial Statements in Part I of this Report, including:

(a)

the series of putative class action lawsuits alleging violations of the federal securities laws by the Company and certain individuals;

(b)

product liability lawsuits;

(c)

lawsuits pertaining to indemnification and employment agreement obligations involving the Company and its former Chief Executive Officer;

(d)

the possibility that the pending lawsuits and investigation by HHS OIG regarding potential false claims under the Title 42 of the U.S. Code could result in significant
civil fines or penalties, including exclusion from participation in federal healthcare programs such as Medicare and Medicaid and the possibility; and

(e)

challenges to our intellectual property rights by actual or potential competitors and challenges to other companies introduction or potential introduction of
generic or competing products by third parties against products sold by the Company;

(7)

the possibility that our current estimates of the financial effect of previously announced product recalls could prove to be incorrect;

the risk that our debt obligations may be accelerated due to our inability to comply with covenants and restrictions contained in our loan agreements;

3

(b)

restrictions on the ability to increase our revenues through certain transactions, including the acquisition or in-licensing of products; and

(c)

risks that present or future changes in the Board of Directors may lead to an acceleration of the Companys debt;

(9)

the risk that we may not be able satisfy the quantitative listing standards of the New York Stock Exchange, including with respect to minimum share price and public
float; and

(10)

the risks detailed from time to time in the Companys filings with the SEC. This discussion is not exhaustive, but is designed to highlight important factors that
may impact our forward-looking statements.

Because the factors referred to above, as well as the statements included under the
captions Part II, Item 1ARisk Factors, Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report, could cause actual results or
outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. All forward-looking statements attributable to us are expressly
qualified in their entirety by the cautionary statements in this Cautionary Note Regarding Forward-Looking Statements and the risk factors that are included under the caption Part II, Item 1ARisk Factors in this
Report, as supplemented by our subsequent SEC filings. Further, any forward-looking statement speaks only as of the date on which it is made and we are under no obligation to update any of the forward-looking statements after the date of this
Report. New factors emerge from time to time, and it is not possible for us to predict which factors will arise, when they will arise and/or their effects. In addition, we cannot assess the impact of each factor on our future business or financial
condition or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

4

PART I. FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; dollars and number of
shares in thousands, except per share data)

Class Aissued 41,157,609; outstanding 37,748,456 and 37,736,660 at December 31, 2010 and March 31, 2010,
respectively

411

411

Class Bissued 12,206,857; outstanding 12,112,285 at both December 31, 2010 and March 31, 2010 (convertible into
Class A shares on a one-for-one basis)

122

122

Additional paid-in capital

172,787

170,022

Retained earnings

(370,871

)

(253,910

)

Accumulated other comprehensive income

951

1,622

Less: Treasury stock, 3,409,073 shares of Class A and 94,572 shares of Class B Common Stock at December 31, 2010, and
3,404,366 shares of Class A and 94,572 shares of Class B Common Stock at March 31, 2010, at cost

K-V Pharmaceutical Company was incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942. K-V Pharmaceutical Company and its wholly-owned subsidiaries,
including Ther-Rx Corporation (Ther-Rx), Nesher Pharmaceuticals, Inc. (Nesher), Ethex Corporation (ETHEX) and Particle Dynamics, Inc. (PDI) are referred to in the following Notes to the Consolidated
Financial Statements as KV or the Company or Registrant. The Companys original strategy was to engage in the development of proprietary drug delivery systems and formulation technologies which enhance the
effectiveness of new therapeutic agents and existing pharmaceutical products. Today the Company utilizes several of those technologies, such as SITE RELEASE® and oral controlled release technologies, in its branded and generic products. In 1990, the Company established a marketing capability in the generic business through
its wholly-owned subsidiary, ETHEX. As more fully described in Note 16Commitments and Contingencies, the Company ceased operations of ETHEX on March 2, 2010, and on November 15, 2010, agreed to file articles of
dissolution and sell the assets and operations of ETHEX to unrelated third parties prior to April 28, 2011. On December 15, 2010 the Company filed articles of dissolution with respect to ETHEX under Missouri law. In 1999, KV established a
wholly-owned subsidiary, Ther-Rx, to market proprietary branded pharmaceuticals directly to physicians. On June 2, 2010, the Company sold PDI. In May 2010, KV established a wholly-owned subsidiary, Nesher, to market and sell the
Companys generic pharmaceuticals.

Significant Developments

During fiscal year 2009, the Company announced six separate voluntary recalls of certain tablet form generic products
as a precaution due to the potential existence of oversized tablets. In December 2008, the U.S. Food and Drug Administration (FDA) began an inspection of the Companys facilities. The Company suspended shipments of all approved
tablet-form products in December 2008 and of all other drug products in January 2009. Also, in January 2009, the Company initiated a nationwide voluntary recall affecting most of its products. On March 2, 2009, the Company entered into a
consent decree with the FDA regarding its drug manufacturing and distribution. The consent decree was entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 6, 2009. As part of the consent decree, the
Company agreed not to directly or indirectly do or cause the manufacture, processing, packing, labeling, holding, introduction or delivery for introduction into interstate commerce at or from any of its facilities of any drug, until the Company has
satisfied certain requirements designed to demonstrate compliance with the FDAs current good manufacturing practice (cGMP) regulations. The consent decree provides for a series of measures that, when satisfied, will permit the
Company to resume the manufacture and distribution of approved drug products. The Company has also agreed not to distribute its products that are not FDA approved, including its prenatal vitamins and hematinic products, unless it obtains FDA
approval for such products through the FDAs New Drug Application (NDA) and Abbreviated New Drug Application (ANDA) processes. These actions and the requirements under the consent decree have had, and are expected to
continue to have, a material adverse effect on the Companys liquidity position and its results of operations. The Company does not expect to generate any significant revenues until it resumes shipping more of its approved products or until and
unless the Company begins to generate significant revenues from the sale of Makena® (see Note 3
Going Concern and Liquidity Considerations). In September 2010, the FDA approved the reopening of the Companys manufacturing with respect to its first product, Potassium Chloride ER Capsules, which commenced sales in that
month. Additional products are in the process of being brought back to market.

Changes in Management and Directors

At the Annual Meeting of Stockholders for the fiscal year ended March 31, 2009 held on June 10, 2010 (the
Annual Meeting), the stockholders elected Gregory Bentley, Mark A. Dow, Terry B. Hatfield, David S. Hermelin, Marc S. Hermelin, Joseph D. Lehrer and John Sampson to serve as directors with terms expiring at the Annual Meeting of
Stockholders for the fiscal year ended March 31, 2010. Former members of the Board Jean M. Bellin, Kevin S. Carlie, Jonathon E. Killmer and Norman D. Schellenger were not re-elected.

8

On June 14, 2010, Stephen A. Stamp resigned, effective immediately, from his position
as Chief Financial Officer of our Company. Thomas S. McHugh was appointed Chief Financial Officer and Treasurer effective July 15, 2010. Prior to this appointment, Mr. McHugh served as Chief Accounting Officer and Vice President of
FinanceCorporate Controller.

On June 15, 2010, each of Mr. Hatfield and Mr. Sampson resigned as members
of the Board, effective as of the earlier of July 7, 2010 or the date a replacement was appointed. Mr. Hatfield served as the Chairman of the Board and Mr. Sampson served on the Audit Committee. Each of Mr. Hatfield and
Mr. Sampson indicated that he was resigning because of serious concerns regarding the ability of the newly-constituted Board and senior management to provide the required independent oversight of the business during the current critical period
in its history.

On June 17, 2010, the Board appointed Ana I. Stancic as a director to fill the vacancy created by the
resignation of Mr. Hatfield. As noted above, Mr. Hatfields resignation became effective upon the appointment of Ms. Stancic.

On July 7, 2010, the Board appointed David Sidransky, M.D. as a director to fill the vacancy created by the resignation of Mr. Sampson. As noted above, Mr. Sampsons resignation became
effective upon the appointment of Dr. Sidransky.

On July 29, 2010, the Board increased the total number of Board
members to eight (but returning automatically to seven members upon any current director leaving the Board) and appointed Robert E. Baldini as a director to fill the newly-created position.

At a Board meeting held subsequent to the Annual Meeting on June 10, 2010, the Board terminated the employment of David A. Van
Vliet, who then served as Interim President and Interim Chief Executive Officer, effective at the end of the 30-day notice period provided for in his employment agreement, during which period he was placed on administrative leave.

Also at that meeting, the Board appointed Gregory J. Divis, Jr. as the Interim President and Interim Chief Executive Officer of our
Company. Mr. Divis was subsequently appointed as our permanent President and Chief Executive Officer on November 17, 2010. The other terms of Mr. Divis employment were not changed by this appointment.

On November 10, 2010, Marc S. Hermelin voluntarily resigned as a member of the Board. We had been advised that the Office of
Inspector General of the U.S. Department of Health and Human Services (HHS OIG) notified Mr. Hermelin that he would be excluded from participating in federal healthcare programs effective November 18, 2010. In an effort to
avoid adverse consequences to our Company, including a potential discretionary exclusion of our Company from participation in federal healthcare programs, and to enable our Company to secure our expanded financial agreement, as more fully described
in Note 12Long-Term Debt with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C. (together, the Lenders), the Company, HHS OIG, Mr. Hermelin and his wife (solely with respect to her obligations thereunder,
including as joint owner with Mr. Hermelin of certain shares of Company stock) entered into a settlement agreement (the Settlement Agreement) under which Mr. Hermelin also resigned as trustee of all family trusts that hold KV
stock, agreed to divest his personal ownership interests in our Companys Class A Common and Class B Common Stock (approximately 1.8 million shares, including shares held jointly with his wife) over an agreed upon period of time in
accordance with a divestiture plan and schedule approved by HHS OIG, and agreed to refrain from voting stock under his personal control. In order to implement such agreement, Mr. Hermelin and his wife granted to an independent third party
immediate irrevocable proxies and powers of attorney to divest their personal stock interests in the Company if Mr. Hermelin does not timely do so. The Settlement Agreement also required Mr. Hermelin to agree, for the duration of his
exclusion, not to seek to influence or be involved with, in any manner, the governance, management, or operations of our Company.

As long as the parties comply with the Settlement Agreement, HHS OIG has agreed not to exercise its discretionary authority to exclude our Company from participation in federal health care programs,
thereby allowing our Company and our subsidiaries (with the single exception of ETHEX, which is being dissolved pursuant to the Divestiture Agreement with HHS OIG) to continue to conduct business through all federal and state healthcare programs.

As a result of Mr. Hermelins resignation and the two agreements with HHS OIG, we believe we have resolved our
remaining issues with respect to HHS OIG and are positioned to continue to participate in Federal healthcare programs now and in the future.

Plea Agreement with the U.S. Department of Justice

As previously
disclosed in our Annual Report on Form 10-K for fiscal year 2009, we, at the direction of a special committee of the Board of Directors that was in place prior to June 10, 2010, responded to requests for information from the Office of the
United States Attorney for the Eastern District of Missouri and FDA representatives working with that office. In connection therewith, on February 25, 2010, the Board, at the recommendation of the special committee, approved entering

9

into a plea agreement with the Office of the United States Attorney for the Eastern District of Missouri and the Office of Consumer Litigation of the United States Department of Justice (referred
to herein collectively as the Department of Justice).

The plea agreement was executed by the parties and was
entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 2, 2010. Pursuant to the terms of the plea agreement, ETHEX pleaded guilty to two felony counts, each stemming from the failure to make and submit a
field alert report to the FDA in September 2008 regarding the discovery of certain undistributed tablets that failed to meet product specifications. Sentencing pursuant to the plea agreement also took place on March 2, 2010.

Pursuant to the plea agreement, ETHEX agreed to pay a criminal fine in the amount of $23.4 million in four installments. The first
installment, in the amount of $2.3 million, was due and paid within 10 days of sentencing. Under the original payment schedule, the second and third installments, each in the amount of $5.9 million, were due on December 15, 2010 and
July 11, 2011, respectively. The fourth and final installment, in the amount of $9.4 million, was due on July 11, 2012. On November 15, 2010, upon the motion of the Department of Justice, the court vacated the previous fine
installment schedule and imposed a new fine installment schedule using the standard federal judgment rate of 0.22% per annum, payable as follows:

Payment Amount

Interest Amount

Payment Due Date

$

1,000

$



December 15, 2010

1,000

1

June 15, 2011

1,000

2

December 15, 2011

2,000

7

June 15, 2012

4,000

18

December 15, 2012

5,000

28

June 15, 2013

7,094

47

December 15, 2013

ETHEX also agreed to pay, within 10 days of sentencing, restitution to the Medicare and the Medicaid
programs in the amounts of $1.8 million and $0.6 million, respectively. In addition to the fine and restitution, ETHEX agreed not to contest an administrative forfeiture in the amount of $1.8 million, which was due and paid within 45 days after
sentencing and which satisfied any and all forfeiture obligations ETHEX may have as a result of the guilty plea. In total, ETHEX agreed to pay fines, restitution and forfeiture in the aggregate amount of $27.6 million.

In exchange for the voluntary guilty plea, the Department of Justice agreed that no further federal prosecution will be brought in the
Eastern District of Missouri against ETHEX, KV and Ther-Rx regarding allegations of the misbranding and adulteration of any oversized tablets of drugs manufactured by us, and the failure to file required reports regarding these drugs and
patients use of these drugs with the FDA, during the period commencing on January 1, 2008 through December 31, 2008.

The Company made its first installment payment due on December 15, 2010.

Agreements with HHS OIG

In connection with the guilty plea described above by ETHEX, ETHEX was expected to be excluded from participation in federal healthcare programs, including Medicare and Medicaid. In addition, as a result
of the guilty plea by ETHEX, HHS OIG had discretionary authority to also exclude KV from participation in federal healthcare programs. However, we are in receipt of correspondence from HHS OIG that, absent any transfer of assets or operations that
would trigger successor liability, HHS OIG has no present intent to exercise its discretionary authority to exclude the Company as a result of the guilty plea by ETHEX.

In connection with the anticipated exclusion of ETHEX from participation in federal healthcare programs, we ceased the operations of ETHEX on March 2, 2010. However, we have retained the ability to
manufacture, market and distribute (once the requirements under the consent decree have been met) all generic products and are in possession of all intellectual property related to generic products, including all NDAs and ANDAs pertaining to our
brand and generic drug products. We currently do not anticipate that the voluntary guilty plea by ETHEX will have a material adverse effect on our efforts to comply with the requirements pursuant to the consent decree and to resume production and
shipments of our approved products.

10

On November 15, 2010, we entered into a divestiture agreement (the Divestiture
Agreement) with HHS OIG under which we agreed to sell the assets and operations of ETHEX to unrelated third parties prior to April 28, 2011 and to file articles of dissolution with respect to ETHEX under Missouri law by that date.
Following the filing, ETHEX may not engage in any new business other than winding up its operations and will engage in a process provided under Missouri law to identify and resolve its liabilities over at least a two-year period. Under the terms of
the Divestiture Agreement, HHS OIG agreed not to exclude ETHEX from federal healthcare programs until April 28, 2011 and, upon completion of the sale of the ETHEX assets and of the filing of the articles of dissolution of ETHEX, the agreement
will terminate. Civil monetary penalties and exclusion of ETHEX may occur if we fail to meet our April 28, 2011 deadline. We have also received a letter from HHS OIG advising us further that assuming that we have complied with all agreements
deemed necessary by HHS OIG, HHS OIG would not exclude ETHEX thereafter. ETHEX filed its articles of dissolution on December 15, 2010, and ETHEX no longer has any ongoing assets or operations other than those required to conclude the winding up
process under Missouri law. ETHEX is currently in the process of selling its assets in order to comply with the Divestiture Agreement.

New Subsidiary

In May 2010, we formed a wholly-owned
subsidiary, Nesher, to operate as the sales and marketing company for our generic products. In July 2010, our Board of Directors directed management to explore strategic alternatives with respect to Nesher and the assets and operations of our
generic products business, which could include a sale of Nesher. We have retained Jefferies & Co., Inc. to advise us with this strategy. In the meantime, we will continue to prepare products for FDA inspection and continue to anticipate the
reintroduction of approved products into the market.

Financing

U.S. Healthcare Loan

On September 13, 2010, the Company entered into a loan agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C., affiliates of Centerbridge Partners L.P. (collectively, U.S.
Healthcare) for a $20,000 loan secured by assets of the Company. The loan agreement included a period of exclusivity through September 28, 2010 to negotiate an expanded, longer-term financial arrangement among the Company and U.S.
Healthcare.

On November 17, 2010, the Company entered into an agreement with U.S. Healthcare for a senior secured debt
financing package of up to $120,000 consisting of (1) a fully funded $60,000 term loan (the Bridge Loan) that retired the $20,000 loan previously provided by U.S. Healthcare on September 13, 2010, and that was provided for
general corporate and working capital purposes and (2) a commitment to provide a multi-draw term loan up to an aggregate principal amount of $120,000 (the Multi-Draw Term Loan) with such additional draws dependent on the achievement
by the Company of various conditions as outlined in the related agreement. The Company expensed approximately $1,949 of unamortized deferred financing costs related to the retirement of the $20,000 as required by accounting for debt extinguishments
in the quarter ended December 31, 2010.

Under the terms of the Bridge Loan agreement, the Company paid interest at an
annual rate of 16.5% (5% of which was payable in kind) with a maturity date in March 2013. The Company furnished as collateral substantially all assets of the Company to secure the loan. The Bridge Loan was guaranteed by certain of the
Companys domestic subsidiaries and the guarantors furnished as collateral substantially all of their assets to secure the guarantee obligations. In addition, the Company issued stock warrants to U.S. Healthcare granting them rights to purchase
up to 12,588 shares of the Companys Class A Common Stock (the Initial Warrants). The Initial Warrants have an exercise price of $1.62 per share, subject to possible anti-dilutive adjustment. These Initial Warrants were
valued at $22,406 using a Monte Carlo simulation model utilizing the following assumptions: risk free rate of 1.5%; expected volatility of 99.0%; expected dividend of $0; expected life of five years and a probability of the Company issuing
additional common stock (Fundamental Transaction) of 10% after the stock price reaches $10.00 per share.

In
recording the Bridge Loan transaction, the Company allocated the proportionate share of the fair value of the Initial Warrants to the September loan. As a result of the proceeds from the Bridge Loan extinguishing the September loan, the fair value
of the Initial Warrants of $7,469 allocated to the September loan was expensed as required by accounting for debt extinguishments in the quarter ended December 31, 2010.

The Company then allocated, the proportionate share of the fair value of the Initial Warrants of $14,937 as a discount to the Bridge Loan. The discount was being amortized using the effective interest
method to interest expense based upon the maturity date of the Bridge Loan. In March 2011, the Company retired the Bridge Loan and expensed the remaining discount in loss on extinguishment of debt.

11

Restatement of Consolidated Financial Statements

The Company originally classified the Warrants as equity instruments from their respective issuance date until the March 17, 2011
amendment of the Warrant provisions which added a contingency feature and an escrow requirement as described in Note 12. At that date, the Warrants were revalued and reclassified from equity into liabilities. The Company had also
originally used a Black-Scholes option valuation model to determine the value of the Warrants. Upon a re-examination of the provisions of the Warrants in November 2011, the Company determined that the non-standard anti-dilution provisions
contained in the Initial Warrants and the as amended Warrants require that (a) the Warrants be treated as liabilities from their issuance date and (b) their value should be calculated utilizing a valuation model which considers the
mandatory conversion features of the Warrants and the possibility that the Company issues additional common shares or common share equivalents that, in turn, could result in a change to the number of shares issuable upon exercise of the Warrants and
the related exercise price. Accordingly, the Company has restated its consolidated financial statements for the fiscal year ended March 31, 2011, and for the quarters ended December 31, 2010 and June 30, 2011.

The impact of the restatement as of December 31, 2010 and for the periods then ended is described in the table below and did not
change the Companys reported cash and cash equivalents, operating expenses, operating losses or cash flows from operations.

As PreviouslyReported

As Restated

Current maturities of long-term debt

$

111,156

$

107,803

Total current liabilities

196,365

193,012

Warrant liability

0

23,916

Total liabilities

529,660

550,223

Additional paid-in capital

192,222

172,787

Accumulated deficit

(369,743

)

(370,871

)

Total shareholders deficit

(233,446

)

(254,009

)

Three Months EndedDecember 31,
2010

Nine Months EndedDecember 31,
2010

AsPreviouslyReported

As Restated

AsPreviouslyReported

As Restated

Statement of Operations data:

Loss on extinguishment of debt

$

9,946

$

9,418

$

9,946

$

9,418

Change in warrant liability

0

1,510

0

1,510

Interest, net and other

3,802

3,948

8,203

8,349

Loss from continuing operations before income taxes

(44,105

)

(45,233

)

(121,358

)

(122,486

)

Loss from continuing operations

(46,664

)

(47,792

)

(123,866

)

(124,994

)

Net loss

(46,664

)

(47,792

)

(115,781

)

(116,909

)

Basic and diluted loss from continuing operations per share

(0.94

)

(0.96

)

(2.48

)

(2.50

)

Basic and diluted net loss per share

(0.94

)

(0.96

)

$

(2.32

)

(2.34

)

Total comprehensive loss

(46,828

)

(47,956

)

(116,453

)

(117,581

)

Statement of Cash Flows data:

Net loss

$

(46,664

)

$

(47,792

)

$

(115,781

)

$

(116,909

)

Change in warrant liability

0

1,510

0

1,510

Loss on extinguishment of debt

9,946

9,418

9,946

9,418

12

Refer also to Note 18Subsequent Events for discussion of other recent
events and developments.

2.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, accordingly, do not include all information and footnotes required by U.S. GAAP for
complete financial statements. For further information, refer to the notes to consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2010. The interim consolidated financial statements
and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys 2010 Form 10-K. The balance sheet information as of March 31, 2010 has been derived from the
Companys audited consolidated balance sheet as of that date. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included in these consolidated
financial statements. Operating results for the three and nine months ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2011.

Reclassification

Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

PDI

We sold PDI on June 2, 2010. The Company identified the
assets and liabilities of PDI as held for sale in the Companys consolidated balance sheet at March 31, 2010 and has segregated PDIs operating results separately for the three and nine months ended December 31, 2010 and 2009.
See Note 15Divestitures for information regarding the sale of PDI.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
in subsequent periods may differ from the estimates and assumptions used in the preparation of the accompanying consolidated financial statements.

The most significant estimates made by management include revenue recognition and reductions to gross revenues, inventory valuation, intangible and other long-lived assets valuations, stock-based
compensation, warrant valuation, income taxes, and loss contingencies related to legal proceedings. Management periodically evaluates estimates used in the preparation of the consolidated financial statements and makes changes on a prospective basis
when adjustments are necessary.

The Company assesses the impairment of its long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The factors that the Company considers in its assessment include the following: (1) significant underperformance of the assets relative to expected historical or projected
future operating results; (2) significant changes in the manner of the Companys use of the acquired assets or the strategy for its overall business; (3) significant negative industry or economic trends; and (4) significant
adverse changes as a result of legal proceedings or governmental or regulatory actions.

Based on the events described in Note
18Subsequent Events, the Company has determined that a triggering event occurred in the fourth quarter of fiscal year 2011 giving rise to the need to assess the recoverability of its long-lived assets. Depending upon which and
when, if any, of the strategic and operating alternatives are implemented, the Company believes that future undiscounted cash flows may not be sufficient to support the carrying value of certain of its long-lived assets and this could result in
material non-cash charges for impairment of inventory, property and equipment, intangible and other long-lived assets in the quarter and year ending March 31, 2011. Cash flow projections require a significant level of judgment and estimation in
order to determine a number of interdependent variables and assumptions such as probability, timing, pricing and various cost factors. Cash flow projections are highly sensitive to changes in these variables and assumptions. Until the Company is
able to determine and assess these variables, it cannot assess the level or range of impairment that may be incurred. Also, until we are able to determine the value of the assets associated with this business, we are unable to determine whether
proceeds upon disposition will be comparable to the current carrying value of the business segment. The result of these determinations will form the basis for managements assumptions regarding the ultimate use and/or potential disposition of
assets. Assumptions necessary to establish the fair value of long-lived assets will be derived from the outcome of these decisions, which we expect will be determined within approximately the next three months from the date of this filing. At that
time management will have the necessary information to prepare its recoverability analysis. As of December 31, 2010, the carrying values of the Companys inventory; property and equipment, net; and intangible assets, net were $8,493,
$109,908 and $49,782, respectively.

13

The Company accounts for the Warrants in accordance with applicable accounting guidance in
ASC 815, Derivatives and Hedging, as derivative liabilities. As such, the Warrants have been classified as long-term liabilities in the Companys consolidated balance sheet. The Company uses the Monte Carlo simulation model to determine
the fair value of the Warrants.

Revenue Recognition

During the three months ended December 31, 2009, the Company received from Purdue Pharma L.P., The P.F.
Laboratories, Inc. and Purdue Pharmaceuticals L.P. (collectively Purdue) and sold to its customers all of the generic OxyContin® allotted under a Distribution and Supply Agreement (the Distribution Agreement) and recognized net revenue of approximately $143,000 in the Consolidated
Statement of Operations. Additionally, the Company recorded approximately $20,000 as cost of sales for the three and nine months ended December 31, 2009, which included royalty fees and the cost of the generic OxyContin® supplied by Purdue. Accordingly, the Company recognized gross profit of approximately $123,000 in the three and nine
months ended December 31,2009 as a result of the Distribution Agreement entered into with Purdue.

3.

Going Concern and Liquidity Considerations

The Companys consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal
course of business. The accompanying historical consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The assessment of the Companys ability to continue as a going concern was made by management considering, among
other factors: (i) the timing and number of approved products that will be introduced or reintroduced to the market and the related costs; (ii) the suspension of shipment of all products manufactured by the Company and the requirements
under the consent decree with the FDA; (iii) the possibility that the Company may need to obtain additional capital despite the proceeds from the private placement of the Companys 12% senior secured notes due 2015 (the 2011
Notes) that it was able to obtain in March 2011 (see Note 18Subsequent Events); (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in
Note 16Commitments and Contingencies; and (v) the Companys ability to comply with debt covenants. The Companys assessment was further affected by the Companys fiscal year 2010 net loss of $283,612, its
net loss for the nine months ended December 31, 2010 of $116,909 and the outstanding balance of cash and cash equivalents of $31,654 and $60,693 as of December 31, 2010 and March 31, 2010, respectively. For periods subsequent to
December 31, 2010, the Company expects losses to continue because the Company is unable to generate any significant revenues from more of its own manufactured products until the Company is able to resume shipping more of its approved products
and until after the Company is able to generate significant sales of Makena® (17-alpha hydroxyprogesterone
caproate) which was approved by the FDA in February 2011. The Company received notification from the FDA on September 8, 2010 of approval to ship into the marketplace the first product approved under the consent decree, i.e., Potassium Chloride
ER Capsule. The Company resumed shipment of extended-release potassium chloride capsule, Micro-K® 10mEq and
Micro-K® 8mEq, in September 2010, resumed shipments of its generic version, Potassium Chloride ER Capsule, in
December 2010 and the Company began shipping Makena® in March 2011. The Company is continuing to prepare other
products for FDA inspection and does not expect to resume shipping other products until fiscal 2012. In addition, the Company must meet ongoing operating costs as well as costs related to the steps the Company is currently taking to prepare for
introducing or reintroducing its approved products to the market. If the Company is not able to obtain the FDAs clearance to resume manufacturing and distribution of more of its approved products in a timely manner and at a reasonable cost, or
if revenues from its sale of approved products introduced or reintroduced into the market place prove to be insufficient, the Companys financial position, results of operations, cash flows and liquidity will continue to be materially adversely
affected. These conditions raise substantial doubt about the Companys ability to continue as a going concern.

Based on current financial projections, management believes the continuation of the Company as a going concern is primarily dependent on its ability to address, among other factors: (i) the
successful launch and product sales of Makena®, at prices meeting the Companys future needs and
expectations; (ii) the timing, number and revenue generation of approved products that will be introduced or reintroduced to the market and the related costs; (iii) the suspension of shipment of all products manufactured by the Company and
the requirements under the consent decree with the FDA (other than the Potassium Chloride ER Capsule product, including
Micro-K® 10mEq and Micro-K® 8mEq, products that are the subject of the FDA notification letter previously discussed); (iv) the possibility that the Company will need to obtain additional
capital (see Note 18Subsequent Events for updates); (v) the potential outcome with respect to the governmental inquiries,

14

litigation or other matters described in Note 16Commitments and Contingencies; and (vi) its compliance with its debt covenants. While the Company addresses these
matters, it must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with introducing and reintroducing approved products to the market (such as costs related to its employees,
facilities and FDA compliance), remaining payments associated with the acquisition and retention of its rights to
Makena® (see Note 5Acquisitions), the financial obligations pursuant to the plea
agreement with the Department of Justice, costs associated with legal counsel and consultant fees, as well as the significant costs, such as legal and consulting fees, associated with the steps taken by the Company in connection with the consent
decree and the litigation and governmental inquiries. If the Company is not able to obtain the FDAs clearance to resume manufacturing and distribution of certain or many of its approved products in a timely manner and at a reasonable cost
and/or if the Company is unable to successfully launch and commercialize Makena® and/or if the Company
experiences adverse outcomes with respect to any of the governmental inquiries or litigation described in Note 16Commitments and Contingencies, its financial position, results of operations, cash flows and liquidity will continue
to be materially adversely affected.

In the near term, the Company is focused on the following:
(i) continuing the commercial launch of Makena®; (ii) meeting the requirements of the consent decree,
which will allow its approved products to be reintroduced to the market (other than the Potassium Chloride ER Capsule product, including Micro-K® 10mEq and Micro-K® 8mEq,
products that are the subject of the FDA notification letter previously discussed); (iii) evaluating strategic alternatives with respect to Nesher and other assets; and (iv) pursuing various means to minimize operating costs and increase
cash. Since December 31, 2010, the Company has generated non-recurring cash proceeds to support its on-going operating and compliance requirements from a $32,300 private placement of Class A Common Stock in February 2011 and a $225,000
private debt placement (see Note 18Subsequent Events) in March 2011 (a portion of which was used to repay all existing obligations under the agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C.)(see Note
12Long-Term Debt for description of U.S. Healthcare I, L.L.C and U.S. Healthcare II, L.L.C loan). While these cash proceeds are expected to be sufficient to meet near term cash requirements, the Company is pursuing ongoing efforts
to increase cash, including, but not limited to the continued implementation of cost savings, exploration of strategic alternatives with respect to Nesher and the assets and operations of the Companys generic products business and other assets
and the return of certain of the Companys approved products to market in a timely manner (other than the Potassium Chloride ER Capsule, including Micro-K® 10mEq and Micro-K® 8mEq,
products that are the subject of the FDA notification letter previously discussed). The Company cannot provide assurance that it will be able to realize the cost reductions it anticipates from reducing its operations or its employee base, that some
or many of its approved products can be returned to the market in a timely manner or at all, that its higher profit approved products will return to the market in the near term or that the Company can obtain additional cash through asset sales, a
successful commercial launch of Makena® or other means. If the Company is unsuccessful in its efforts to
introduce or return its products to market, or if needed to sell assets and raise additional capital in the near term, the Company will be required to further reduce its operations, including further reductions of its employee base, or the Company
may be required to cease certain or all of its operations in order to offset the lack of available funding.

The Company
continues to evaluate the sale of certain of its assets and businesses, including the sale of its generics business as a result of a strategic decision to focus on being a branded pharmaceutical company. However, due to general economic conditions,
the Company will likely be exposed to risks related to the overall macro-economic environment, including a lower rate of return than it has historically experienced on its invested assets and being limited in its ability to sell assets. In addition,
the Company cannot provide any assurance that it will be successful in finding suitable purchasers for the sale of such assets. Even if the Company is able to find purchasers, it may not be able to obtain attractive terms and conditions for such
sales, including attractive pricing. In addition, divestitures of businesses involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in
revenues and earnings associated with the divested business, and the disruption of operations in the affected business. Furthermore, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure
of significant financial and employee resources. Inability to consummate identified asset sales or manage the post-separation transition arrangements could adversely affect the Companys business, financial condition, results of operations,
cash flows, and ability to comply with the obligations in its outstanding debt.

4.

Recently Issued Accounting Standards

There have been no new recent accounting pronouncements or changes in accounting pronouncements for the nine months ended December 31, 2010 as compared to the recent accounting pronouncements
described in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2010. The Company has adopted or will adopt, as applicable, accounting pronouncements that are effective for fiscal year 2011.

15

5.

Acquisitions

On January 16, 2008, the Company entered into an Asset Purchase Agreement (the Original Agreement) with Cytyc Prenatal Products Corp. and Hologic, Inc. (Cytyc Prenatal Products Corp. and
Hologic, Inc. are referred to collectively as Hologic). On January 8, 2010, the Company and Hologic entered into an Amendment (Amendment No. 1) to the Original Agreement, which, among other things, included a
$70,000 cash payment for the exclusive rights to Makena®, which was recorded as purchased in-process
research and development expense on the statement of operations for the year ended March 31, 2010. On February 4, 2011, the Company entered into a second amendment (Amendment No. 2) to the Original Agreement. The
amendments set forth in Amendment No. 2 reduced the payment to be made on the fifth business day following the day on which Hologic gave the Company notice that the FDA has approved Makena® (the Transfer Date) to $12,500 and revised the schedule for making the remaining payments of $107,500. Under these revised payment provisions, after the
$12,500 payment on the Transfer Date and a subsequent $12,500 payment twelve months after the date that the FDA approves
Makena® (the Approval Date), the Company has the right to elect between the two alternate payment
schedules for the remaining payments, with royalties of 5% of the net sales of Makena® payable for certain
periods and under different circumstances, depending on when the Company elects to make the remaining payments. The Company may make any of the payments on or before their due dates, and the date on which the Company makes the final payment
contemplated by the selected payment schedule will be the final payment date, after which royalties, if any, will cease to accrue. Under the Indenture governing the 2011 Notes, the Company shall make a $45,000 payment on or prior to the first
anniversary of the Makena® NDA Approval Date; provided that notwithstanding the foregoing, the Company shall
have the ability to modify the amount or timing of such payment so long as the revised payment schedule (i) is not materially less favorable to security holders of the 2011 Notes than the royalty schedule under the Makena® agreement as in effect on the issue date of the 2011 Notes and (ii) does not increase the total payments to
Hologic during the term of the 2011 Notes. See Note 18Subsequent Events for further description and timing of payments of Amendment No. 2.

6.

Earnings (Loss) Per Share

The Company has two classes of common stock: Class A Common Stock and Class B Common Stock that is convertible into Class A
Common Stock. With respect to dividend rights, holders of Class A Common Stock are entitled to receive cash dividends per share equal to 120% of the dividends per share paid on the Class B Common Stock. For purposes of calculating basic loss
per share, undistributed losses are allocated to each class of common stock based on the contractual participation rights of each class of security.

The Company presents diluted loss per share for Class B Common Stock for all periods using the two-class method which does not assume the conversion of Class B Common Stock into Class A Common Stock.
The Company presents diluted loss per share for Class A Common Stock using the if-converted method which assumes the conversion of Class B Common Stock into Class A Common Stock, if dilutive.

Basic loss per share is computed using the weighted average number of common shares outstanding during the period except that it does not
include unvested common shares subject to repurchase. Diluted loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of
the incremental common shares issuable upon the exercise of stock options and warrants, unvested common shares subject to repurchase, convertible preferred stock and convertible notes. The dilutive effects of outstanding stock options and warrants
and unvested common shares subject to repurchase are determined by application of the treasury stock method. Convertible preferred stock and convertible notes are determined on an if-converted basis. The computation of diluted loss per share for
Class A Common Stock assumes the conversion of the Class B Common Stock, while the diluted loss per share for Class B Common Stock does not assume the conversion of those shares.

16

The following tables set forth the computation of basic loss per share for the three and
nine months ended December 31, 2010 and 2009:

Allocation of undistributed earnings from discontinued operations for diluted computation





1,252

211

Allocation of undistributed earnings (loss)

$

(47,810

)

$

(11,606

)

$

109,496

$

18,426

Denominator:

Number of shares used in basic computation

37,795

12,116

37,797

11,982

Weighted average effect of dilutive securities:

Conversion of Class B to Class A shares

12,116



11,982



Employee stock options





2,524



Convertible preferred stock





338



Convertible notes





8,692



Number of shares used in per share computations

49,911

12,116

61,333

11,982

Diluted earnings (loss) per share from continuing operations

$

(0.96

)

$

(0.96

)

$

1.77

$

1.52

Diluted earnings per share from discontinued operations





0.02

0.02

Diluted earnings (loss) per share (1)(2)

$

(0.96

)

$

(0.96

)

$

1.79

$

1.54

(1)

For the three months ended December 31, 2010, there were stock options to purchase 1,635 shares (excluding 1,851 out of the money shares) of Class A Common
Stock, 104 out of the money shares of Class B Common Stock, preferred shares convertible into 338 shares of Class A Common Stock, $200,000 principal amount of convertible notes convertible into 8,692 shares of Class A Common Stock and
Warrants to purchase 12,588 shares of Class A Common Stock that were excluded from the computation of diluted loss and diluted loss from continuing operations per share because their effect would have been anti-dilutive.

(2)

For the three months ended December 31, 2009, there were stock options to purchase 1,691 out of the money shares of Class A Common Stock and 28 out of the
money shares of Class B Common Stock that were excluded from the computation of diluted loss per share because their effect would have been anti-dilutive.

18

Nine Months Ended December 31,

2010(As
Restated)

2009

Class A

Class B

Class A

Class B

Diluted loss per share:

Numerator:

Allocation of undistributed loss from continuing operations

$

(94,607

)

$

(30,439

)

$

(3,841

)

$

(1,222

)

Reallocation of undistributed loss from continuing operations as a result of conversion of Class B to Class A
shares

(30,439

)



(1,222

)



Allocation of undistributed loss from continuing operations for diluted computation

(125,046

)

(30,439

)

(5,063

)

(1,222

)

Allocation of undistributed earnings from discontinued operations

1,673

538

3,497

1,112

Reallocation of undistributed earnings from discontinued operations as a result of conversion of Class B to Class A
shares

538



1,112



Allocation of undistributed earnings from discontinued operations for diluted computation

2,211

538

4,609

1,112

Allocation of undistributed gain on sale of discontinued operations

4,444

1,430





Reallocation of undistributed gain on sale of discontinued operations as a result of conversion of Class B to Class A
shares

1,430







Allocation of undistributed gain on sale of discontinued operations for diluted computation

5,874

1,430





Allocation of undistributed loss

$

(116,961

)

$

(28,471

)

$

(454

)

$

(110

)

Denominator:

Number of shares used in basic computation

37,795

12,160

37,799

12,024

Weighted average effect of dilutive securities:

Conversion of Class B to Class A shares

12,160



12,024



Number of shares used in per share computations from continuing operations

49,955

12,160

49,823

12,024

Number of shares used in per share computations from discontinuing operations

49,955

12,160

49,823

12,024

Diluted loss per share from continuing operations

$

(2.50

)

$

(2.50

)

$

(0.10

)

$

(0.10

)

Diluted earnings per share from discontinued operations

0.04

0.04

0.09

0.09

Diluted earnings per share from gain on sale of discontinued operations

0.12

0.12





Diluted loss per share (3)(4)

$

(2.34

)

$

(2.34

)

$

(0.01

)

$

(0.01

)

(3)

For the nine months ended December 31, 2010, there were stock options to purchase 1,635 shares (excluding 1,851 out of the money shares) of Class A Common
Stock, 104 out of the money shares of Class B Common Stock, preferred shares convertible into 338 shares of Class A Common Stock, $200,000 principal amount of convertible notes convertible into 8,692 shares of Class A Common Stock and
Warrants to purchase 12,588 shares of Class A Common Stock that were excluded from the computation of diluted loss per share because their effect would have been anti-dilutive.

(4)

For the nine months ended December 31, 2009, there were stock options to purchase 1,110 shares (excluding 3,086 out of the money shares) of Class A Common
Stock, stock options to purchase 2 shares (excluding 55 out of the money shares) of Class B Common Stock, preferred shares convertible into 338 shares of Class A Common Stock and $200,000 principal amount of convertible notes convertible into
8,692 shares of Class A Common Stock that were excluded from the computation of diluted loss per share because their effect would have been anti-dilutive.

7.

Investment Securities

The carrying amount of available-for-sale securities and their approximate fair values at December 31, 2010 and March 31, 2010
were as follows:

December 31, 2010

Cost

GrossUnrealizedGains

GrossUnrealizedLosses

FairValue

Non-current auction rate securities

$

61,049

$

2,037

$



$

63,086

March 31, 2010

Cost

GrossUnrealizedGains

GrossUnrealizedLosses

FairValue

Non-current auction rate securities

$

62,949

$

2,916

$



$

65,865

19

At December 31, 2010 and March 31, 2010, the Company had $69,150 and $71,550,
respectively, of principal invested in auction rate securities (ARS). These securities all have a maturity in excess of 10 years. The Companys investments in ARS primarily represent interests in collateralized debt obligations
supported by pools of student loans, the principal of which is guaranteed by the U.S. Government. ARS backed by student loans are viewed as having low default risk and therefore very low risk of credit downgrade. The ARS held by the Company are
AAA-rated securities with long-term nominal maturities for which the interest rates are reset through a Dutch auction process that occurs at pre-determined intervals of up to 35 days. Prior to 2008, the auctions provided a liquid market for these
securities.

With the liquidity issues experienced in global credit and capital markets, the ARS held by the Company at
December 31, 2010 and March 31, 2010 experienced multiple failed auctions beginning in February 2008 as the amount of securities submitted for sale exceeded the amount of purchase orders. Given the failed auctions, the Companys ARS
are considered illiquid until a successful auction for them occurs. Accordingly, the $63,086 and $65,865 of ARS at December 31, 2010 and March 31, 2010, respectively, were classified as non-current assets and are included in the line item
Investment securities in the accompanying Consolidated Balance Sheets.

On February 25, 2009, the Company
initiated legal action against Citigroup Global Markets Inc. (CGMI), through which it acquired the ARS the Company held at that time, in the District Court for the Eastern District of Missouri. On January 21, 2010, the Company and
CGMI entered into a Purchase and Release Agreement pursuant to which CGMI agreed to purchase the Companys remaining ARS for an aggregate purchase price of approximately $61,707. The Company also received a two-year option (which expires on
January 21, 2012) to reacquire the ARS (in whole or on a class-by-class basis) for the prices at which they were sold, as well as the right to receive further payments in the event any ARS are redeemed prior to the expiration of the option.

In accordance with authoritative guidance ASC 860, Transfers and Servicing, the Company accounted for the ARS transfer
to CGMI, including the two-year option to reacquire the ARS, as a secured borrowing with pledge of collateral. The transfer of the ARS to CGMI does not meet all of the conditions set forth in ASC 860 in order to be accounted for as a sale. As a
secured borrowing with pledge of collateral, the Company was required to record a short-term liability (collateralized borrowing) as of December 31, 2010 for the ARS sale proceeds, representing a borrowing of cash from CGMI (see
Note 12Long-Term Debt). The ARS have been transferred to CGMI and serve as a pledge of collateral under this borrowing. The Company will continue to carry the ARS as an asset in the accompanying Consolidated Balance Sheets, and it
will continue to adjust to the ARS fair value on a quarterly basis (see Note 8Fair Value Measures). In the event any ARS are redeemed prior to the expiration of the option, the Company will account for the redemptions as a
sale pursuant to ASC 860.

The Company faces significant liquidity concerns as discussed in Note 3Going Concern
and Liquidity Considerations. As a result, the Company determined that it could no longer support its previous assertion that it had the ability to hold impaired securities until their forecasted recovery. Accordingly, the Company concluded
that the ARS became other-than-temporarily impaired during December 2008 and recorded a $9,122 loss into earnings. This adjustment reduced the carrying value of the ARS to $63,678 at December 31, 2008. The estimated fair value of the
Companys ARS holdings at March 31, 2010 was $65,865. The Company recorded discount accretion of $292 on the carrying value of ARS and recorded the $2,916 difference between the fair value of the Companys ARS at March 31, 2010
in accumulated other comprehensive income as an unrealized gain of $1,846, net of tax. The estimated fair value of the Companys ARS holdings at December 31, 2010 was $63,086. The Company recorded discount accretion of $211 on the carrying
value of ARS and recorded the $2,037 difference between the fair value of the Companys ARS at December 31, 2010 in accumulated other comprehensive income as an unrealized gain of $1,286, net of tax.

Since the transfer of the ARS to CGMI on January 21, 2010, $1,150 and $2,400 par value were redeemed in the three and nine months
ended December 31, 2010, respectively. The Company has received from CGMI cash proceeds in the amount of $198 and $424 for the three and nine months ended December 31, 2010, respectively, representing the difference between the principal
amount of securities redeemed and the price in which they were previously sold to CGMI. The Company also recorded a gain in the Consolidated Statement of Operations for the three and nine months ended December 31, 2010 in the amount of $79 and
$232, respectively, representing the difference between the principal amount of the securities redeemed and their carrying value prior to redemption.

The ARS are valued based on a discounted cash flow model that considers, among other factors, the time to work out the market disruption in the traditional trading mechanism, the stream of cash flows
(coupons) earned until maturity, the prevailing risk free yield curve, credit spreads applicable to a portfolio of student loans with various tenures and ratings and an illiquidity premium. These factors were used in a Monte Carlo simulation model
to derive the estimated fair value of the ARS.

20

8.

Fair Value Measures

In
September 2006, the FASB issued authoritative guidance for fair value measurements. The Company implemented the authoritative guidance, effective April 1, 2008, which relates to disclosures for financial assets, financial liabilities, and any
other assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the authoritative guidance established a fair value hierarchy that ranks the
quality and reliability of the information used to measure fair value. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:



Level 1Primarily consists of financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or
liabilities in an active market that the Company has the ability to access.



Level 2Includes financial instruments measured using significant other observable inputs that are valued by reference to similar assets or
liabilities, such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset
or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.



Level 3Comprised of financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement. These inputs reflect managements own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The following tables present the Companys fair value hierarchy as of December 31, 2010 for those financial assets and
liabilities measured at fair value on a recurring basis:

Fair Value Measurements at December 31, 2010 (As
Restated)

Total

Level 1

Level 2

Level 3

Non-current ARS

$

63,086

$



$



$

63,086

Warrant liability

$

(23,916

)

$



$



$

(23,916

)

The following tables present the Companys fair value hierarchy as of March 31, 2010 for those
financial assets measured at fair value on a recurring basis:

Fair Value Measurements at March 31, 2010

Total

Level 1

Level 2

Level 3

Non-current ARS

$

65,865

$



$



$

65,865

Due to the lack of observable market quotes and an illiquid market for the Companys ARS portfolio
that existed as of December 31, 2010, the Company utilized a valuation model that relied exclusively on Level 3 inputs, including those that are based on expected cash flow streams and collateral values (see Note 7Investment
Securities).

The Companys Warrant liability represents Warrants issued to U.S. Healthcare to purchase an
aggregate of up to 12,588 shares of Class A Common Stock at an exercise price of $1.62 per share. (See Note 19Warrant Liability).

The contingent interest feature of the $200,000 principal amount of Contingent Convertible Subordinated Notes (see Note 12Long-Term Debt) meets the criteria of and qualifies as an
embedded derivative. Although this feature represents an embedded derivative financial instrument, based on its de minimis value at the time of issuance and at December 31, 2010, no value has been assigned to this embedded derivative.

21

The following table presents the changes in fair value for financial assets measured at
fair value on a recurring basis using significant unobservable inputs (Level 3):

Non-Current AuctionRate Securities(Level 3)

Balance at April 1, 2010

$

65,865

Unrealized loss included in other comprehensive loss

(879

)

Accretion of investment impairment

211

Redemptions

(2,111

)

Balance at December 31, 2010

$

63,086

WarrantLiability (Level
3)2011

Balance at beginning of year

$



Initial valuation

(22,406

)

Unrealized loss included in other expense

(1,510

)

Balance at December 31, 2010

$

(23,916

)

9.

Inventories

Inventories, net of reserves, consisted of:

2010

December 31,

March 31,

Raw materials

$

6,836

$

5,019

Finished goods

1,657

465

$

8,493

$

5,484

Management establishes reserves for potentially obsolete or slow-moving inventory based on an evaluation
of inventory levels, forecasted demand, and market conditions.

The Company ceased all manufacturing activities during the
fourth quarter of fiscal year 2009, and its net revenues in the period ended December 31, 2010 and December 31, 2009 are limited primarily to sales of products manufactured by third parties. Additionally, all costs associated with the
Companys manufacturing operations are recognized directly into cost of sales rather than capitalized into inventory.

10.

Intangible Assets

Intangible assets consisted of:

2010

December 31,

March 31,

GrossCarryingAmount (a)

AccumulatedAmortization

NetCarryingAmount

GrossCarryingAmount (a)

AccumulatedAmortization

NetCarryingAmount

Product rights acquired:

Micro-K®

$

36,140

$

(21,307

)

$

14,833

$

36,140

$

(19,952

)

$

16,188

Evamist®

21,175

(8,690

)

12,485

21,175

(7,876

)

13,299

Trademarks acquired:

Evamist®

5,082

(2,454

)

2,628

5,082

(2,283

)

2,799

License agreements:

Evamist®

35,648

(16,028

)

19,620

35,648

(14,748

)

20,900

Other













Covenants not to compete:

Evamist®

627

(627

)



627

(627

)



Trademarks and patents

1,504

(1,416

)

88

1,308

(1,308

)



Other

367

(239

)

128

691

(216

)

475

Total intangible assets

$

100,543

$

(50,761

)

$

49,782

$

100,671

$

(47,010

)

$

53,661

(a)

Gross Carrying Amount is shown net of impairment charges.

22

In May 2007, the Company acquired the U.S. marketing rights to Evamist®, a transdermal estrogen therapy, from VIVUS, Inc. Under the terms of the asset purchase agreement for Evamist®, the Company paid $10,000 in cash at closing and made an additional cash payment of $141,500 upon final approval of
the product by the FDA. The agreement also provides for two future payments upon achievement of certain net sales milestones. If Evamist® achieves $100,000 of net sales in a fiscal year, a one-time payment of $10,000 will be made, and if net sales reach $200,000 in a fiscal year, a one-time payment of
up to $20,000 will be made.

Because the product had not obtained FDA approval when the initial payment
was made at closing, the Company recorded $10,000 of in-process research and development expense during the three months ended June 30, 2007. In July 2007, FDA approval for Evamist® was received and a payment of $141,500 was made to VIVUS, Inc. The final purchase price allocation completed during the fiscal year ended March 31, 2009,
resulted in estimated identifiable intangible assets of $44,078 for product rights; $12,774 for trademark rights; $82,542 for rights under a sublicense agreement; and $2,106 for a covenant not to compete. Upon FDA approval in July 2007, the Company
began amortizing the product rights, trademark rights and rights under the sublicense agreement over 15 years and the covenant not to compete over nine years. As no net sales milestones have yet been met, no additional payments have been made.
Evamist® net sales were approximately $8,800 and $2,600 in fiscal years 2010 and 2009, respectively. It was
concluded that the assets related to Evamist® were impaired as of March 31, 2010. The Company recorded
$78,968 during fiscal year 2010 as an impairment charge to reduce the carrying value of the intangible assets related to
Evamist® to its estimated fair value.

As of December 31, 2010, the Companys product rights acquired, trademark rights acquired, license agreements, trademarks and patents, and other intangible assets have weighted average useful
lives of approximately 17 years, 15 years, 15 years, 13 years, and 5 years, respectively. Amortization of intangible assets was $1,175 and $2,980 for the three months ended December 31, 2010 and December 31, 2009, respectively, and $3,660
and $8,875 for the nine months ended December 31, 2010 and 2009, respectively.

Management tests the carrying value of
intangible assets for impairment at least annually and also assesses and evaluates on a quarterly basis if any events have occurred which indicate the possibility of impairment. During the assessment as of December 31, 2010, management did not
identify any events that were indicative of impairment. However, any significant changes in actual future results from the assessment used to perform the quarterly evaluation, such as lower sales, increases in production costs, technological changes
or decisions not to produce or sell products, could result in impairment at a future date (see Note 2Basis of Presentation).

Assuming no other additions, disposals or adjustments are made to the carrying values and/or useful lives of the intangible assets, annual amortization expense on product rights, trademarks acquired and
other intangible assets is estimated to be approximately $5,000 in each of the five succeeding fiscal years.

11.

Accrued Severance and Salary Reduction

Accrued severance consists primarily of severance benefits owed to employees whose employment was terminated in connection with the ongoing realignment of the Companys cost structure. Severance
expense recognized in the three months ended December 31, 2010 was recorded in part to restructuring charges, which are included in selling and administrative and in part to cost of sales in the consolidated statement of operations. Subsequent
to March 31, 2010, certain executives of the Company, including the former Interim President and Interim Chief Executive Officer resigned or were terminated. As a result, the Company, pursuant to existing employment agreements, incurred
severance related expenses, which were recorded in the nine months ended December 31, 2010. The activity in accrued severance for the nine months ended December 31, 2010 and twelve months ended March 31, 2010 are summarized as
follows:

2010

December 31,

March 31,

Balance at beginning of period

$

6,243

$

10,002

Provision for severance benefits

2,130

6,925

Amounts charge to accrual

(7,407

)

(10,684

)

Balance at end of period

$

966

$

6,243

23

On September 13, 2010, the Company implemented a mandatory salary reduction program
for most of its exempt personnel, ranging from 15% to 25% of base salary, in order to conserve cash and financial resources. The Company plans on repaying its employees, who are still employed by the Company at the time of payment, during fiscal
year 2012. At December 31, 2010 the Company recorded a liability of $1,633 related to the salary reduction program. In March 2011, the salaries of exempt personnel were reinstated.

12.

Long-Term Debt

Long-term
debt consisted of:

2010

December 31,(As
Restated)

March 31,

Convertible notes

$

200,000

$

200,000

Building mortgages

33,600

35,288

Collateralized borrowing

59,248

61,224

US Healthcare loan (less discount on loan of $14,194)

46,173



Software financing arrangement



588

339,021

297,100

Less current portion

(107,803

)

(63,926

)

$

231,218

$

233,174

Convertible notes

In May 2003, the Company issued $200,000 principal amount of 2.5% Contingent Convertible Subordinated Notes (the Notes) that are convertible, under certain circumstances, into shares of
Class A Common Stock at an initial conversion price of $23.01 per share. The Notes, which mature on May 16, 2033, bear interest that is payable on May 16 and November 16 of each year at a rate of 2.50% per annum. The Company
also is obligated to pay contingent interest at a rate equal to 0.5% per annum during any six-month period from May 16 to November 15 and from November 16 to May 15, with the initial six-month period commencing May 16,
2006, if the average trading price of the Notes per $1,000 principal amount for the five trading day period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. In November
2007, the average trading price of the Notes reached the threshold for the five-day trading period that resulted in the payment of contingent interest and for the period from November 16, 2007 to May 15, 2008 the Notes paid interest at a
rate of 3.00% per annum. In May 2008, the average trading price of the Notes fell below the contingent interest threshold for the five-day trading period and beginning May 16, 2008 the Notes began to pay interest at a rate of
2.50% per annum, which is the current rate as of December 31, 2010.

The Company may redeem some or all of the Notes
at any time, at a redemption price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest, including contingent interest, if any. Holders may require the Company to repurchase all or a portion of their Notes
on May 16, 2013, 2018, 2023 and 2028 or upon a change in control, as defined in the indenture governing the Notes, at a purchase price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest, including
contingent interest, if any. Holders had the right to require the Company to repurchase all or a portion of their Notes on May 16, 2008 and, accordingly, the Company classified the Notes as a current liability as of March 31, 2008. Since
no holders required the Company to repurchase all or a portion of their Notes on this date and because the next occasion holders may require the Company to repurchase all or a portion of their Notes is May 16, 2013, the Notes were classified as
a long-term liability as of December 31, 2010 and March 31, 2010. The Notes are subordinate to all of the Companys existing and future senior obligations.

24

The Notes are convertible, at the holders option, into shares of the Companys
Class A Common Stock prior to the maturity date under the following circumstances:



during any future quarter, if the closing sale price of the Companys Class A Common Stock over a specified number of trading days during the
previous quarter is more than 120% of the conversion price of the Notes on the last trading day of the previous quarter. The Notes are initially convertible at a conversion price of $23.01 per share, which is equal to a conversion rate of
approximately 43.4594 shares per $1,000 principal amount of Notes;



if the Company has called the Notes for redemption;



during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the Notes per $1,000
principal amount for each day of such period was less than 95% of the product of the closing sale price of our Class A Common Stock on that day multiplied by the number of shares of our Class A Common Stock issuable upon conversion of
$1,000 principal amount of the Notes; or



upon the occurrence of specified corporate transactions.

The Company has reserved 8,692 shares of Class A Common Stock for issuance in the event the Notes are converted.

The Notes, which are unsecured, do not contain any restrictions on the payment of dividends, the incurrence of additional indebtedness or the repurchase of the Companys securities, and do not
contain any financial covenants. However, a failure by the Company or any of its subsidiaries to pay any indebtedness or any final non-appealable judgments in excess of $750 constitutes an event of default under the indenture. An event of
default would permit the trustee under the indenture or the holders of at least 25% of the Notes to declare all amounts owing to be immediately due and payable and exercise other remedies.

Building mortgages

In March 2006, the Company entered into a $43,000 mortgage loan arrangement with LaSalle National Bank Association, in part, to refinance $9,859 of existing mortgages. The $32,764 of net proceeds the
Company received from the mortgage loan was used for working capital and general corporate purposes. The mortgage loan, which is secured by four of the Companys buildings, bears interest at a rate of 5.91% and matures on April 1, 2021.
The Company is current in all its financial payment obligations under the mortgage loan arrangement. However, at March 31, 2009 and 2010, the Company was not in compliance with one or more of the requirements of the mortgage loan documentation.
At March 31, 2009, the entire amount outstanding under the mortgage was classified as a current liability.

On
August 5, 2010, the Company received a letter approving certain waivers (the Waiver Letter) of covenants under the mortgage loan dated March 23, 2006, by and between MECW, LLC, a subsidiary of our Company, and LaSalle National
Bank Association, and certain other loan documents entered into in connection with the execution of the mortgage loan (collectively, the Loan Documents). LNR Partners, Inc., the servicer of the loan (LNR Partners), issued the
Waiver Letter to the Company and MECW, LLC on behalf of the lenders under the Loan Documents. In the Waiver Letter, the lenders consented to the following under the Loan Documents:



Waiver of the requirement that the Company and MECW, LLC deliver audited balance sheets, statements of income and expenses and cash flows;



Waiver of the requirement that the Company certify financial statements delivered under the Loan Documents;



Waiver of the requirement that the Company deliver to the lenders Form 10-Ks within 75 days of the close of the fiscal year, Form 10-Qs within 45 days
of the close of each of the first three fiscal quarters of the fiscal year, and copies of all IRS tax returns and filings; and



Waiver, until March 31, 2012, of the requirement that the Company maintain a net worth, as calculated in accordance with the terms of the Loan
Documents, of at least $250,000 on a consolidated basis.

With respect to the waiver of the requirement to
deliver Form 10-Ks and Form 10-Qs, the Company agreed to bring its filings current effective with the submission of the Form 10-Q for the quarter ended December 31, 2010 and become timely on a go-forward basis with the filing of the Form 10-K
for the fiscal year ending March 31, 2011. This waiver applies to the Companys existing late filings. Accordingly, the portion of the mortgage not payable in the following 12 months was classified as a long-term liability as of
December 31, 2010 and March 31, 2010.

In addition to the waivers, LNR Partners also agreed to remove the
Companys subsidiaries ETHEX and PDI as guarantors under the Loan Documents and to add Nesher as a new guarantor under the Loan Documents.

25

U.S. Healthcare loan

On September 13, 2010, the Company entered into a loan agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C.
(together, the Lenders), affiliates of Centerbridge Partners, L.P. for a $20,000 loan (the Loan) secured by assets of the Company. The loan agreement included a period of exclusivity through September 28, 2010 to
negotiate an expanded, longer-term financial arrangement among the Company and the Lenders.

On November 17, 2010, the
Company entered into an agreement with the Lenders, for a senior secured debt financing package of up to $120,000 consisting of (1) a fully funded $60,000 term loan (the Bridge Loan) that retired the $20,000 loan previously provided
by the Lenders on September 13, 2010, and that was provided for general corporate and working capital purposes and (2) a commitment to provide a multi-draw term loan up to an aggregate principal amount of $120,000 (the Multi-Draw
Term Loan) with such additional draws dependent on the achievement by the Company of various conditions as outlined in the related agreement. The Company wrote-off approximately $1,949 of deferred financing costs related to the retirement of
the $20,000 as required by accounting for debt extinguishments in the quarter ended December 31, 2010.

Under the terms
of the Bridge Loan agreement, the Company paid interest at an annual rate of 16.5% (5% of which was payable in kind) with a maturity date in March 2013. The Company furnished as collateral substantially all assets of the Company to secure the loan.
The Bridge Loan was guaranteed by certain of the Companys domestic subsidiaries and the guarantors furnished as collateral substantially all of their assets to secure the guarantee obligations. In addition, the Company issued stock warrants to
the Lenders granting them rights to purchase up to 12,588 shares of the Companys Class A Common Stock (the Initial Warrants). The Initial Warrants have an exercise price of $1.62 per share, subject to possible non-standard
anti-dilutive adjustment. These Warrants were valued at $22,406 using a Monte Carlo simulation model utilizing the following assumptions: risk free rate of 1.5%; expected volatility of 99.0%; expected dividend of $0; expected life of five years and
a probability of the Company issuing additional common stock (Fundamental Transaction) of 10% after the stock price reaches $10.00 per share.

In recording the Bridge Loan transaction, the Company allocated the proportionate share of the fair value of the Initial Warrants to the Loan. As a result of the proceeds from the Bridge Loan
extinguishing the Loan, the fair value of the Initial Warrants of $7,469 allocated to the Loan was expensed as required by accounting for debt extinguishments in the quarter ended December 31, 2010.

In recording the Initial Warrants and debt associated with the Bridge Loan, the Company allocated the proportionate share of the fair
value of the Initial Warrants of $14,937 as a discount to the Bridge Loan. The discount is being amortized using the effective interest method to interest expense based upon the maturity date of the Bridge Loan. In March 2011, the Company retired
the Bridge Loan as further described in Note 18Subsequent Events at which time the remaining debt discount will be expensed.

The $120,000 Multi-Draw Term Loan consisted of three tranches that would have been available to the Company following the achievement of certain conditions. The first tranche of $80,000 would have been
available upon the approval of Makena® and would have been used to repay the Bridge Loan of $60,000, make a
milestone payment to Hologic, and provide funds for general corporate and working capital purposes. The second tranche of $20,000 would have been available to the Company upon achieving at least one of certain performance thresholds including
either, (1) certain metrics associated with Evamist®, or (2) receiving FDA approval for the
manufacture and distribution of Clindesse® and Gynazole-1®. The proceeds of the second tranche would have been used for general corporate and working capital purposes. The third tranche of $20,000 would have been available to
the Company upon evidencing its ability, to the satisfaction of the Lenders, to meet certain liquidity thresholds necessary to satisfy future obligations, including a future milestone payment to Hologic that is due to be paid one year following FDA
approval of Makena®. The proceeds from the third tranche would have been used for general corporate and working
capital purposes.

The Company and the Lenders amended the financing arrangements on January 6, 2011 and again on
March 2, 2011. Pursuant to the amendments, the Company and the Lenders amended the Bridge Loan terms and covenants to reflect the Companys then current projections and timing of certain anticipated future events, including the planned
disposition of certain assets. The amendments extended the $60,000 payment that was due on March 20, 2011 to three payments of $20,000 each with the first payment due (and paid on February 18, 2011) upon closing and funding the private
placement of Class A Common Stock, $20,000 due in April 2011 and $20,000 due in August 2011. In addition, all past covenant issues were waived. As a result of the amendments, the Company would not have been required to sell its generics
business by March 20, 2011, but would have been required to cause such sale by August 31, 2011. In addition, the applicable premium (a make-whole payment of interest with respect to payments on the loans prior to maturity) was amended to
provide that if the Bridge Loan was repaid in full as a result of a refinancing transaction provided other than by the Lenders, as has occurred on March 17, 2011 with the issuance of the 2011 Notes, a premium was paid to the Lenders equal to
$12,500, of which $7,295

26

has already been paid in connection with the private placement. In addition, on March 17, 2011, an amount of $7,500 was placed in escrow and will be released to the Company or to the Lenders
on August 31, 2011 or September 30, 2011, as the case may be, depending on the status of the Companys registration process with the SEC by such dates and the Companys stock price meeting certain specified levels as of the
applicable date. In connection with the amendments and certain waivers granted by the Lenders, the Company issued additional Warrants to the Lenders to purchase up to 7,451 shares of the Companys Class A Common Stock, at an exercise
price of $1.62 per share, and amended and restated the Initial Warrants. The Company is in the process of valuing the additional Warrants.

The Multi-Draw Term Loan, as amended, provided for a total commitment of $118,000. If entered into, the Multi-Draw Term Loan, as amended, would have refinanced the Bridge Loan in full and would have
provided $70,000 of additional financing consisting of (i) a $30,000 tranche B-2 term loan and (ii) a $40,000 tranche B-3 term loan. The withdrawal schedule under the Multi-Draw Term Loan was revised to allow for release of funds from
controlled accounts on the closing date sufficient to repay the Bridge Loan and future draws against the Multi-Draw Term Loan, subject to achievement of certain Makena® related milestones, of $15,000 in March 2011, $15,000 in May 2011 and $10,000 in each of July, August, September and October 2011. The commitment letter for the
Multi-Draw Term Loan would have expired on March 31, 2011.

On February 7, 2011, the Company repaid a portion of the
Bridge Loan with proceeds from a private placement of Class A Common Stock and on March 17, 2011, the Company repaid in full the remaining obligations under the Bridge Loan (including the payment of related premiums) with a portion of the
proceeds of the offering of the 2011 Notes (and terminated the related future loan commitments). See Note 18Subsequent Events for further discussion on these financial arrangements.

Collateralized borrowing

On February 25, 2009, the Company initiated legal action against Citigroup Global Markets Inc. (CGMI), through which it acquired the ARS the Company held at that time, in the District
Court for the Eastern District of Missouri. On January 21, 2010, the Company and CGMI entered into a Purchase and Release Agreement pursuant to which CGMI agreed to purchase the Companys remaining ARS for an aggregate purchase price of
approximately $61,707. The Company also received a two-year option (which expires on January 21, 2012) to reacquire the ARS (in whole or on a class-by-class basis) for the prices at which they were sold, as well as the right to receive further
payments in the event any ARS are redeemed prior to the expiration of the option.

In accordance with authoritative guidance
ASC 860, Transfers and Servicing, the Company accounted for the ARS transfer to CGMI, including the two-year option to reacquire the ARS, as a secured borrowing with pledge of collateral. The transfer of the ARS to CGMI does not meet all of
the conditions set forth in ASC 860 in order to be accounted for as a sale. As a secured borrowing with pledge of collateral, the Company was required to record a short-term liability (collateralized borrowing) as of March 31, 2010
for the ARS sale proceeds, representing a borrowing of cash from CGMI. The ARS have been transferred to CGMI and serve as a pledge of collateral under this borrowing. The Company will continue to carry the ARS as an asset in the accompanying
Consolidated Balance Sheets, and it will continue to adjust to the ARS fair value on a quarterly basis (see Note 8Fair Value Measures). In the event any ARS are redeemed prior to the expiration of the option, the
Company will account for the redemptions as a sale pursuant to ASC 860. Through December 31, 2010, $2,400 par value of ARS ($1,976 at CGMI purchase cost) were redeemed.

Software Financing Arrangement

The Company entered into an
installment payment arrangement with a financial institution for the purchase of software products and the right to receive consulting or other services from the seller. The Company is amortizing the amounts paid ratably over the service period over
16 consecutive quarters which ended in December 2010. The Company renegotiated the contract on November 10, 2010 and will pay for services it receives as they are incurred.

Interest Paid

The Company paid interest of $4,160 and $3,057 for the three months ended December 31, 2010 and 2009, respectively, and $7,842 and $6,722 for the nine months ended December 31, 2010 and 2009,
respectively.

13.

Comprehensive Loss

Comprehensive loss includes all changes in equity during a period except those that resulted from investments by or distributions to the
Companys shareholders. Other comprehensive loss refers to revenues, expenses, gains and losses that, under U.S. GAAP, are included in comprehensive loss, but excluded from net loss as these amounts are recorded directly as an adjustment to
shareholders deficit. For the Company, comprehensive loss is comprised of net loss, the net changes in

27

unrealized gains and losses on available for sale marketable securities, net of applicable income taxes, and changes in the cumulative foreign currency translation adjustment. Total comprehensive
(loss) income was $(47,956) and $108,998 for the three months ended December 31, 2010 and 2009, respectively, and $(117,581) and $148 for the nine months ended December 31, 2010 and 2009, respectively.

14.

Segment Reporting

The
reportable operating segments of the Company are branded products (through the Companys Ther-Rx subsidiary) and specialty generic/non-branded products (through the Companys Nesher subsidiary). The branded products segment includes
patent-protected products and certain trademarked off-patent products that the Company sells and markets as branded pharmaceutical products. The specialty generic/non-branded segment includes off-patent pharmaceutical products that are
therapeutically equivalent to proprietary products. The Company sells its branded and specialty generic/non-branded products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores.

In the fourth quarter of fiscal year 2009, the Company decided to market the Companys specialty materials segment, PDI, for sale
because of liquidity concerns and the Companys expected near-term cash requirements. As a result, the Company has segregated PDIs operating results and presented them separately as a discontinued operation for all periods presented. (See
Note 15Divestitures for more information regarding the sale of PDI.)

In connection with the plea agreement
with the Department of Justice and the anticipated exclusion of ETHEX from participation in federal healthcare programs, the Company ceased operations of ETHEX on March 2, 2010 and under an agreement with the HHS OIG, filed articles of
dissolution for ETHEX on December 15, 2010 and commenced a sale of the remaining assets of ETHEX to be completed under such agreement by April 28, 2011. However, the Company has retained the ability to manufacture (once the requirements
under the consent decree have been met), market and distribute all generic products and is in possession of all intellectual property related to generic products, including all NDAs and ANDAs, which it now does under its Nesher subsidiary. (See Note
16Commitments and Contingencies.)

Accounting policies of the segments are the same as the Companys
consolidated accounting policies. Segment profits are measured based on income before taxes and are determined based on each segments direct revenues and expenses. The majority of research and development expense, corporate general and
administrative expenses, amortization, interest expense, impairment charges, litigation expense and interest and other income are not allocated to segments, but included in the all other classification. Identifiable assets for the two
reportable operating segments primarily include receivables, inventory, and property and equipment. For the all other classification, identifiable assets consist of cash and cash equivalents, certain property and equipment not included
with the two reportable segments, intangible and other assets and all income tax related assets.

The following represents
information for the Companys reportable operating segments (excluding discontinued operations) for the three and nine months ended December 31, 2010 and 2009:

Three MonthsEndedDecember 31,

BrandedProducts

SpecialtyGenerics

All Other

Eliminations

Consolidated

Net Revenues

2010

$

3,979

$

1,431

$

10

$



$

5,420

2009

3,065

144,415





147,480

Segment profit (loss)

2010 (As Restated)

(1,971

)

1,043

(44,305

)



(45,233

)

2009

(4,794

)

136,259

(48,287

)



83,178

Identifiable assets

2010

4,837

6,770

286,365

(1,758

)

296,214

2009

2,335

10,913

557,891

(1,758

)

569,381

Property and equipment additions

2010





3



3

2009





256



256

Depreciation and amortization

2010

11

13

3,806



3,830

2009

132

17

7,670



7,819

28

Nine MonthsEndedDecember 31,

BrandedProducts

SpecialtyGenerics

All Other

Eliminations

Consolidated

Net Revenues

2010

$

11,200

$

893

$

10

$



$

12,103

2009

11,287

145,733

7



157,027

Segment profit (loss)

2010 (As Restated)

(8,414

)

(509

)

(113,563

)



(122,486

)

2009

(11,387

)

133,741

(151,172

)



(28,818

)

Property and equipment additions

2010





323



323

2009





3,583



3,583

Depreciation and amortization

2010

65

46

12,276



12,387

2009

396

52

23,247



23,695

Consolidated revenues are principally derived from customers in North America and substantially all
property and equipment is located in the St. Louis, Missouri metropolitan area.

15.

Divestitures

Sale
of Sucralfate ANDA

On May 7, 2010, the Company received $11,000 in cash proceeds, and a right to receive an
additional payment of $2,000 based on the occurrence of certain events, from the sale of certain intellectual property and other assets related to the Companys ANDA, submitted with the FDA for the approval to engage in the commercial
manufacture and sale of 1gm/10mL sucralfate suspension. All prior activities related to the intellectual property were expensed as incurred resulting in a recognized gain equal to the cash proceeds received. The $2,000 will be recorded as a gain
when, and if, the events stipulated in the agreement occur and payment is earned.

Sale of PDI

In March 2009, because of liquidity concerns and the Companys expected near-term cash requirements, the Companys Board
approved managements recommendation to market PDI for sale. PDI, formerly a wholly-owned subsidiary of the Company, develops and markets specialty value-added raw materials, including drugs, directly compressible and micro encapsulated
products, and other products used in the pharmaceutical industry and other markets. As a result of the decision to sell PDI, the Company identified the assets and liabilities at PDI as held for sale at March 31, 2010. The activity of PDI is
recorded in discontinued operations for the nine months ended December 31, 2010 and for the three and nine months ended December 31, 2009, respectively.

On June 2, 2010 (the Closing Date), pursuant to the Asset Purchase Agreement (the PDI Agreement) by and among the Company, PDI, DrugTech Corporation (DrugTech) and
Particle Dynamics International, LLC (the Purchaser), the Company, PDI and DrugTech sold to the Purchaser certain assets associated with the business of PDI (as described below, the Divested PDI Assets).

The Divested PDI Assets, as more fully described in the PDI Agreement, consist of all of the right, title and interest in, to and under
(1) the assets, rights, interests and other properties, real, personal and mixed, tangible and intangible, and goodwill owned by PDI and used by PDI on the Closing Date in its business, which consists of developing and marketing specialty
value-added raw materials, including drugs, directly compressible and micro-encapsulated products and other products used in the pharmaceutical industry and other markets (including but not limited to the products specifically identified in the PDI
Agreement) for the pharmaceutical, nutritional, food and personal-care industries using proprietary technologies, (2) the intellectual property owned by DrugTech related to certain PDI product lines, including U.S. and foreign patents and
trademarks, and (3) certain leases with respect to facilities used by PDI that were leased by the Company. The Purchaser also agreed to hire approximately 24 employees of the Company that were employed in the operation of the PDI business.

In consideration for the Divested PDI Assets, the Purchaser (1) paid to the Company on the Closing Date $24,600 in cash,
subject to certain operating working capital adjustments, and (2) assumed certain liabilities, including certain contracts.

29

The Company incurred fees of $578 in connection with the transaction. The Purchaser deposited $2,000 of the purchase price in an escrow arrangement for post-closing indemnification purposes. Any
uncontested amounts that remain in the escrow account in December 2011 will be paid to the Company. The operating working capital adjustments, assumed liabilities and escrow arrangement are more fully described in the PDI Agreement. In addition, the
Purchaser also agreed to pay to the Company four contingent earn-out payments in total aggregate amount up to, but not to exceed, $5,500.

The four earn-out payments are determined as follows:



For every dollar of EBITDA (as such term is defined in the PDI Agreement) earned by the Purchaser or its affiliates during the first year following the
Closing Date with respect to sales of PDI products in excess of $7,400, the Company will receive $3.00, up to a maximum aggregate amount of $1,833 (the First Earn-Out).



For every dollar of EBITDA earned by the Purchaser or its affiliates during the second year following the Closing Date with respect to sales of PDI
products in excess of $8,400, the Company will receive $3.00, up to a maximum aggregate amount of $1,833 (the Second Earn-Out). In addition, to the extent that the First Earn-Out is not fully earned during the first year following the
Closing Date, for every dollar of EBITDA earned by the Purchaser or its affiliates during the second year following the Closing Date with respect to sales of PDI products in excess of $7,400, the Company will receive $1.50, up to a maximum aggregate
amount of $1,333. However, the sum of the total aggregate earn-out payments payable after the first and the second year following the Closing Date may not exceed $3,667.



For every dollar of EBITDA earned by the Purchaser or its affiliates during the third year following the Closing Date with respect to sales of PDI
products in excess of $8,900, the Company will receive $3.00, up to a maximum aggregate amount of $1,833 (the Third Earn-Out). In addition, to the extent that the Second Earn-Out is not fully earned during the second year following the
Closing Date, for every dollar of EBITDA earned by the Purchaser or its affiliates during the third year following the Closing Date with respect to sales of PDI products in excess of $8,400, the Company will receive $1.50, up to a maximum aggregate
amount of $1,333.



To the extent that the Third Earn-Out is not fully earned during the third year following the Closing Date, for every dollar of EBITDA earned by the
Purchaser or its affiliates during the fourth year following the Closing Date with respect to sales of PDI products in excess of $8,900, the Company will receive $1.50, up to a maximum aggregate amount of $1,333.

The above-described earn-out payments are fully subordinated to outstanding indebtedness of the Purchaser pursuant to certain
subordination arrangements entered into on the Closing Date by the Company. In connection with the sale of the Divested PDI Assets, the Company and the Purchaser also entered into a transition services agreement on the Closing Date, pursuant to
which the Company agrees to provide certain transition assistance to the Purchaser for up to a one-year period.

The Company
recorded a gain on sale of $5,874, net of tax, in connection with the PDI transaction in the quarter ended June 30, 2010 and a deferred gain of $2,000 related to the amounts held in escrow. Any awards that remain in escrow in December 2011 will
be paid to the Company and will be recognized as a gain.

The table below reflects the operating results of PDI for the three
and nine months ended December 31, 2009 and 2010, respectively and net assets held for sale at March 31, 2010.

Three MonthsEndedDecember 31,

Nine Months
EndedDecember 31,

2009

2010

2009

Net revenues

$

4,402

$

2,729

$

11,649

Cost of sales

3,551

2,518

9,074

Gross profit

851

211

2,575

Operating expenses:

Research and development

2

1

7

Selling and administrative

(1,128

)

(3,284

)

(4,712

)

Total operating expenses

(1,126

)

(3,283

)

(4,705

)

Operating income

1,977

3,494

7,280

Income tax

725

1,283

2,671

Net income

$

1,252

$

2,211

$

4,609

Gain on sale of assets (net taxes of $-, $3,405 and $-)

$



$

5,874

$



30

March 31,2010

Net assets held for sale

Receivables, net

$

3,644

Inventories, net

3,672

Total current assets held for sale

7,316

Property and equipment, less accumulated depreciation

6,731

Intangible assets and goodwill, net

557

Total assets held for sale

$

14,604

Accounts payable and accrued liabilities

$

1,078

Total liabilities associated with assets held for sale

$

1,078

On June 1, 2009, a leased facility used by PDI was damaged by an accidental fire. The incident did
not affect any of the Companys finished product manufacturing, packaging or distribution facilities. The Company received insurance proceeds of $5,600 during the fiscal year ended March 31, 2010, which were used to repair and restore the
damaged facility. The insurance proceeds have been reflected as a gain within selling and administrative expenses in the periods in which payment was received, while expenditures have been reflected as operating expenses or capitalized property and
equipment in the period incurred. In the second quarter of fiscal 2011, the Company received additional insurance proceeds and recorded additional gains of $3,528.

16.

Commitments and Contingencies

Contingencies

The Company is currently subject to legal proceedings
and claims that have arisen in the ordinary course of business. While the Company is not presently able to determine the potential liability, if any, related to all such matters, the Company believes the matters it currently faces, individually or
in the aggregate, could have a material adverse effect on its financial condition or operations or liquidity.

The Company has licensed the exclusive rights to co-develop and market various generic equivalent products with other drug delivery companies. These collaboration agreements require the Company to make
up-front and ongoing payments as development milestones are attained. If all milestones remaining under these agreements were reached, payments by the Company could total up to $350. On January 8, 2010, the Company and Hologic entered into an
amendment to the original Makena® asset purchase agreement. See Note 5Acquisitions for more
information about the amended agreement. On February 4, 2011 the Company entered into an Amendment No. 2 to the Original Agreement. See Note 18Subsequent Events for a further description of Amendment No. 2.

On December 5, 2008, the Board terminated the employment agreement of Marc S. Hermelin, the Chief Executive Officer of
the Company at that time, for cause (as that term is defined in such employment agreement). In addition, the Board removed Mr. M. Hermelin as Chairman of the Board and as the Chief Executive Officer, effective December 5, 2008.
In accordance with the termination provisions of his employment agreement, the Company determined that Mr. M. Hermelin would not be entitled to any severance benefits. In addition, as a result of Mr. M. Hermelins termination
for cause, the Company determined it was no longer obligated for the retirement benefits specified in the employment agreement. However, Mr. M. Hermelin informed the Company that he believed he effectively retired from his
employment with the Company prior to the termination of his employment agreement on December 5, 2008 by the Board. If it is determined that Mr. M. Hermelin did effectively retire prior to December 5, 2008, the actuarially determined
present value (as calculated in December 2008) of the retirement benefits due to him would total $36,900. On November 10, 2010, Mr. M. Hermelin voluntarily resigned as a member of the Board. On March 22, 2011, Mr. M. Hermelin
made a demand on the Company for indemnification with respect to $1,900 in fines paid by Mr. M. Hermelin in connection with a guilty plea during March with respect to two federal misdemeanor counts pertaining to being the responsible corporate
officer of the Company at the time that there was a misbranding of two morphine sulfate tablets containing more of the active ingredient than stated on the label, in addition to

31

certain attorneys fees and expenses. In addition, the Company had previously advanced approximately $3,700 to Mr. M. Hermelin for legal fees under the terms of an indemnification
agreement between Mr. M. Hermelin and the Company that was established when he served as Chairman of the Board and Chief Executive Office of the Company. The Company has also received but not paid approximately $1,000 of billings for additional
legal fees for which Mr. M. Hermelin is demanding indemnification. As a condition for the advancement of Mr. M. Hermelins expenses under his indemnification agreement, he signed an undertaking to reimburse the Company for the
advanced expenses in the event that it is found that he was not entitled to indemnification. The indemnification demand and the amounts previously advanced and unpaid are under review by the Company.

Litigation and Governmental Inquiries

Resolution of one or more of the matters described below could have a material adverse effect on the Companys results of operations, financial condition or liquidity. The Company intends to
vigorously defend its interests in the matters described below while cooperating in governmental inquiries.

Accrued
litigation consists of settlement obligations as well as loss contingencies recognized by the Company because settlement was determined to be probable and the related payouts were reasonably estimable. Accrued litigation consists of settlement
obligations as well as loss contingencies recognized by the Company because settlement was determined to be probable and the related payouts were reasonably estimable. While the outcome of the current claims cannot be predicted with certainty, the
possible outcome of claims is reviewed at least quarterly and an adjustment to the Companys accrual is recorded as deemed appropriate based upon these reviews. Based upon current information available, the resolution of legal matters
individually or in aggregate could have a material adverse effect on the Companys results of operations, financial condition or liquidity. The Company is unable to estimate the possible loss or range of losses at December 31, 2010.

The Company and its subsidiaries DrugTech Corporation and Ther-Rx were named as defendants in a
declaratory judgment case filed in the U.S. District Court for the District of Delaware by Lannett Company, Inc. on June 6, 2008 and styled Lannett Company Inc. v. KV Pharmaceuticals et al. The action sought a declaratory judgment of
patent invalidity, patent non-infringement, and patent unenforceability for inequitable conduct with respect to five patents owned by, and two patents licensed to, the Company or its subsidiaries and pertaining to the PrimaCare ONE® product marketed by Ther-Rx Corporation; unfair competition; deceptive trade practices; and antitrust violations. On
June 17, 2008, the Company filed suit against Lannett in the form of a counterclaim, asserting infringement of three of the Companys patents, infringement of its trademarks (PrimaCare® and PrimaCare ONE®), and
various other claims. On March 23, 2009 a Consent Judgment was entered by the U.S. District Court of Delaware, in which the patents were not found invalid or unenforceable, and the manufacture, sale, use, importation, and offer for sale of the
Lannett Products Multivitamin with Minerals and OB-Natal ONE were found to infringe the patents. Judgment was also entered in favor of the Company on its claim for trademark infringement based on Lannetts marketing of Multivitamin with
Minerals in bottles. Unless permitted by license, Lannett, its officers, directors, agents, and others in active concert and participation with them are permanently enjoined and restrained from infringing on these patents during the terms of such
patents, by making, using, selling, offering for sale, or importing the products or mere colorable variations thereof; and unless permitted by license, Lannett is permanently enjoined and restrained from infringing the trademark PrimaCare ONE. All
other claims and counterclaims have been dismissed with prejudice. On March 17, 2009, the Company and Lannett entered into a settlement and license agreement pursuant to which Lannett may continue to market its prenatal products under the
Companys U.S. Patent Nos. 6,258,846 (the 846 Patent), 6,576,666 (the 666 Patent) and 7,112,609 (the 609 Patent) until the later of (1) October 17, 2009, or (2) 45 days after the Company
notifies Lannett in writing that the Company has received regulatory approval to return PrimaCare ONE or a successor product to the market or that the Company has entered into an agreement with a third-party that intends to introduce a product under
the PrimaCare marks evidenced by U.S. Trademark Registrations 2,582,817 and 3,414,475. In consideration for the foregoing, Lannett has agreed to pay the Company a royalty fee equal to (1) 20% of Lannetts net sales of its prenatal products
using the license set forth in the settlement and license agreement on or before October 17, 2009 and (2) 15% of such net sales after October 17, 2009. On May 27, 2010, Lannett filed suit against the Company and its subsidiaries
alleging breach of the binding agreement and settlement reached on March 17, 2009. On June 30, 2010, the Company, Drug Tech and Ther-Rx filed a Motion for Summary Judgment Dismissing Lannetts Complaint and Summary Judgment on
Counterclaims for Breach of Contract. On December 15, 2010, the parties entered into a Settlement Agreement pursuant to which Lannett agreed to pay the Company $850 for all royalties owed by Lannett to the Company, the license previously
granted by the Company to Lannett would cease on January 1, 2011, and Lannett and its affiliates would cease making, using or selling products covered by the licensed patents, and following receipt of the payment, the lawsuit would be
dismissed. We recorded $850 in royalty income in December 2010.

Due to the consent decree, an approval or a tentative
approval was not obtained in the required time frame for any of the Companys Paragraph IV ANDA filings. Therefore, the 180 days Hatch-Waxman exclusivity was lost.

32

The Company and ETHEX were named as defendants in a case brought by CIMA LABS, Inc. and
Schwarz Pharma, Inc. and styled CIMA LABS, Inc. et al. v. KV Pharmaceutical Company et al., filed in U.S. District Court for the District of Minnesota. CIMA alleged that the Company and ETHEX infringed on a CIMA patent in connection with the
manufacture and sale of Hyoscyamine Sulfate Orally Dissolvable Tablets, 0.125 mg. The Court entered a stay pending the outcome of the U.S. Patent and Trademark Offices (USPTO) reexamination of a patent at issue in the suit. On
August 17, 2009, the Court entered an order administratively terminating this action in Minnesota, but any party has the right to seek leave to reinstitute the case. On September 30, 2009, on appeal of the Examiners
rejection of the claims, the Board of Patent Appeals and Interferences affirmed the Examiners rejections. After the Boards denial of CIMAs appeal, CIMA requested a rehearing with the Board, which remains pending.

The Company and/or ETHEX have been named as defendants in certain multi-defendant cases alleging that the defendants reported improper or
fraudulent pharmaceutical pricing information, i.e., Average Wholesale Price, or AWP, and/or Wholesale Acquisition Cost, or WAC, information, which allegedly caused the governmental plaintiffs to incur excessive costs for pharmaceutical products
under the Medicaid program. Cases of this type have been filed against the Company and/or ETHEX and other pharmaceutical manufacturer defendants by the States of Massachusetts, Alabama, Mississippi, Louisiana, Utah and Iowa, by New York City, and by
approximately 45 counties in New York State. The State of Mississippi effectively voluntarily dismissed the Company and ETHEX without prejudice on October 5, 2006 by virtue of the States filing an Amended Complaint on such date that does
not name either the Company or ETHEX as a defendant. On August 13, 2007, ETHEX settled the Massachusetts lawsuit and received a general release of liability with no admission of liability. On October 7, 2008, ETHEX settled the Alabama
lawsuit for $2,000 and received a general release of liability with no admission of liability. On November 25, 2009, ETHEX settled the New York City and New York county cases (other than the Erie, Oswego and Schenectady County cases) for $3,000
and received a general release of liability. On February 23, 2010, ETHEX settled the Iowa lawsuit for $500 and received a general release of liability. On August 25, 2010, ETHEX settled the Erie, Oswego and Schenectady Counties lawsuit for
$80 and received a general release of liability. On October 21, 2010, the Company received a subpoena from the Florida Office of Attorney General requesting information related to ETHEXs pricing and marketing activities. The Company is
currently complying with the States request for documents and pricing information. In November 2010, the Company and ETHEX were served with a complaint with respect to an AWP case filed by the State of Louisiana. In January 2011, the Company
filed Defendants Exceptions of Nonconformity and Vagueness of the Petition, Improper Cumulation and Joinder, No Right of Action, Prescription and Preemption and No Cause of Action with respect to the Louisiana lawsuit.

The Company received a subpoena from the HHS OIG, seeking documents with respect to two of ETHEXs nitroglycerin products. Both are
unapproved products, that is, they have not received FDA approval. (In certain circumstances, FDA approval may not be required for drugs to be sold in the marketplace.) The subpoena states that it is in connection with an investigation into
potential false claims under Title 42 of the U.S. Code, and appears to pertain to whether these products were eligible for reimbursement under federal health care programs. On or about July 2, 2008, the Company received a supplementary subpoena
in this matter, seeking additional documents and information. In a letter dated August 4, 2008, that subpoena was withdrawn and a separate supplementary subpoena was substituted. In October 2009, HHS OIG identified five additional products as
being subject to its investigation: Hydro-tussin (carbinoxamine); Guaifenex (extended release); Hyoscyamine sulfate (extended-release); Hycoclear (hydrocodone); and Histinex (hydrocodone). The Company has provided additional documents requested in
the subpoena, as supplemented. Discussions with the U.S. Department of Justice and the United States Attorneys Office for the District of Massachusetts indicate that this matter is a False Claims Act qui tam action that is currently still
under seal and that the government is reviewing similar claims relating to other drugs manufactured by ETHEX, as well as drugs manufactured by other companies. The Company has not been provided a copy of the qui tam complaint. On or about
March 26, 2009, the Company consented to an extension of the time during which the government may elect to intervene in the qui tam lawsuit. The Company has been in discussions with the HHS OIG and Department of Justice regarding possible
settlement of these claims.

On December 12, 2008, by letter, the Company was notified by the staff of the SEC that it
had commenced an informal inquiry to determine whether there have been violations of certain provisions of the federal securities laws. On November 23, 2010, by email, the Company was notified by the staff of the SEC that it had commenced an
informal inquiry pertaining to potential insider trading and requested information pertaining to an employee. The Company is cooperating with the government and, among other things, has provided copies of requested documents and information. On
February 22, 2011, the staff of the SEC sent the Company a letter advising it that it had closed this inquiry as to the Company and did not intend to recommend any enforcement action pertaining to the Company.

As previously disclosed in our Annual Report on Form 10-K for fiscal year 2010, we, at the direction of a special committee of the Board
of Directors that was in place prior to June 10, 2010, responded to requests for information from the Office of the United States Attorney for the Eastern District of Missouri and FDA representatives working with that office. In connection
therewith, on February 25, 2010, the Board, at the recommendation of the special committee, approved entering into a plea agreement subject to court approval with the Office of the United States Attorney for the Eastern District of Missouri and
the Office of Consumer Litigation of the United States Department of Justice (referred to herein collectively as the Department of Justice).

33

The plea agreement was executed by the parties and was entered by the U.S. District Court,
Eastern District of Missouri, Eastern Division on March 2, 2010. Pursuant to the terms of the plea agreement, ETHEX pleaded guilty to two felony counts, each stemming from the failure to make and submit a field alert report to the FDA in
September 2008 regarding the discovery of certain undistributed tablets that failed to meet product specifications. Sentencing pursuant to the plea agreement also took place on March 2, 2010.

Pursuant to the plea agreement, ETHEX agreed to pay a criminal fine in the amount of $23,437 in four installments. The first installment,
in the amount of $2,344, was due within 10 days of sentencing. The second and third installments, each in the amount of $5,859, are due on December 15, 2010 and July 11, 2011, respectively. The fourth and final installment, in the amount
of $9,375, is due on July 11, 2012. ETHEX also agreed to pay, within 10 days of sentencing, restitution to the Medicare and the Medicaid programs in the amounts of $1,762 and $573, respectively. In addition to the fine and restitution, ETHEX
agreed not to contest an administrative forfeiture in the amount of $1,796, which was payable 45 days after sentencing and satisfies any and all forfeiture obligations ETHEX may have as a result of the guilty plea. In total, ETHEX agreed to pay
fines, restitution and forfeiture in the aggregate amount of $27,569.

On November 15, 2010, upon the motion of the
Department of Justice, the court vacated the previous fine installment schedule and imposed a new fine installment schedule using the standard federal judgment rate of 0.22% per annum, payable as follows:

Payment Amount

Interest Amount

Payment Due Date

$

1,000

$



December 15, 2010

1,000

1

June 15, 2011

1,000

2

December 15, 2011

2,000

7

June 15, 2012

4,000

18

December 15, 2012

5,000

28

June 15, 2013

7,094

47

December 15, 2013

The Company made its first installment payment due on December 15, 2010.

In exchange for the voluntary guilty plea, the Department of Justice agreed that no further federal prosecution will be brought in the
Eastern District of Missouri against ETHEX, the Company or the Companys wholly-owned subsidiary, Ther-Rx, regarding allegations of the misbranding and adulteration of any oversized tablets of drugs manufactured by the Company, and the failure
to file required reports regarding these drugs and patients use of these drugs with the FDA, during the period commencing on January 1, 2008 through December 31, 2008.

In connection with the guilty plea by ETHEX, ETHEX was expected to be excluded from participation in federal healthcare programs,
including Medicare and Medicaid. In addition, as a result of the guilty plea by ETHEX, HHS OIG had discretionary authority to also exclude the Company from participation in federal healthcare programs. However, the Company is in receipt of
correspondence from the Office of the HHS OIG stating that, absent any transfer of assets or operations that would trigger successor liability, HHS OIG has no present intent to exercise its discretionary authority to exclude the Company as a result
of the guilty plea by ETHEX.

In connection with the previously anticipated exclusion of ETHEX from participation in federal
healthcare programs, the Company ceased operations of ETHEX on March 2, 2010. However, the Company has retained the ability to manufacture, market and distribute (once the requirements under the consent decree have been met) all generic
products and is in possession of all intellectual property related to generic products, including all NDAs and ANDAs.

On
November 15, 2010, the Company entered into the Divestiture Agreement with HHS OIG under which the Company agreed to sell the assets and operations of ETHEX to unrelated third parties prior to April 28, 2011 and to file articles of
dissolution with respect to ETHEX under Missouri law by such date. Following such filing, ETHEX may not engage in any new business other than for winding up its operations and will engage in a process provided under Missouri law to identify and
resolve its liabilities over at least a two year period. Under the terms of the agreement, HHS OIG agreed not to exclude ETHEX from federal healthcare programs until April 28, 2011 and, upon completion of the sale of the ETHEX assets and of the
filing of the articles of dissolution of ETHEX, the agreement will terminate. Civil monetary penalties and exclusion of ETHEX may occur if the Company fails to meet its April 28, 2011 deadline. The Company has also received a

34

letter from HHS OIG advising it further that assuming that it has complied with all agreements deemed necessary by HHS OIG, ETHEX has filed its articles of dissolution, and ETHEX no longer has
any ongoing assets or operations other than those required to conclude the winding up process under Missouri law, HHS OIG would not exclude ETHEX thereafter. The Company has notified all parties of its intent to dissolve ETHEX and notifications were
sent out on January 28, 2011. ETHEX is currently in the process of selling its assets in accordance with the Divestiture Agreement.

The Company currently does not anticipate that the voluntary guilty plea by ETHEX will have a material adverse effect on the Companys efforts to comply with the requirements pursuant to the consent
decree and to resume production and shipments of its approved products.

On November 10, 2010, Marc S. Hermelin
voluntarily resigned as a member of the Board. The Company had been advised that HHS OIG notified Mr. Hermelin that he would be excluded from participating in federal healthcare programs effective November 18, 2010. In an effort to avoid
adverse consequences to the Company, including a potential discretionary exclusion of the Company, and to enable it to secure its expanded financial agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C., the Company, HHS OIG,
Mr. Hermelin and his wife (solely with respect to her obligations thereunder, including as joint owner with Mr. Hermelin of certain shares of Company stock) entered into the Settlement Agreement under which Mr. Hermelin also resigned
as trustee of all family trusts that hold KV stock, agreed to divest his personal ownership interests in the Companys Class A Common and Class B Common Stock (approximately 1.8 million shares, including shares held jointly with his
wife) over an agreed upon period of time in accordance with a divestiture plan and schedule approved by HHS OIG, and agreed to refrain from voting stock under his personal control. In order to implement such agreement, Mr. Hermelin and his wife
granted to an independent third party immediate irrevocable proxies and powers of attorney to divest their personal stock interests in the Company if Mr. Hermelin does not timely do so. The Settlement Agreement also required Mr. Hermelin
to agree, for the duration of his exclusion, not to seek to influence or be involved with, in any manner, the governance, management, or operations of the Company. On March 14, 2011, Mr. Hermelin pleaded guilty to two federal misdemeanor
counts pertaining to misbranding of two oversized morphine sulfate tablets, as a responsible corporate officer of the Company at the time that such tablets were introduced into interstate commerce. On March 22, 2011, Mr. M. Hermelin made a
demand on the Company for indemnification with respect to $1,900 in fines paid by Mr. M. Hermelin in connection with a guilty plea during March with respect to two federal misdemeanor counts pertaining to being the responsible corporate officer
of the Company at the time that there was a misbranding of two morphine sulfate tablets containing more of the active ingredient than stated on the label, in addition to certain attorneys fees and expenses. In addition, the Company had
previously advanced approximately $3,700 to Mr. M. Hermelin for legal fees under the terms of an indemnification agreement between Mr. M. Hermelin and the Company that was established when he served as Chairman of the Board and Chief
Executive Office of the Company. The Company has also received but not paid approximately $1,000 of billings for additional legal fees for which Mr. M. Hermelin is demanding indemnification. As a condition for the advancement of
Mr. M. Hermelins expenses under his indemnification agreement, he signed an undertaking to reimburse the Company for the advanced expenses in the event that it is found that he was not entitled to indemnification. The indemnification
demand and the amounts previously advanced and unpaid are under review by the Company.

As long as the parties comply with the
Settlement Agreement, HHS OIG has agreed not to exercise its discretionary authority to exclude the Company from participation in federal health care programs, thereby allowing the Company and its subsidiaries (with the single exception of ETHEX,
which is being dissolved pursuant to the Divestiture Agreement with HHS OIG) to continue to conduct business through all federal and state healthcare programs.

As a result of Mr. Hermelins resignation and the two agreements with HHS OIG, the Company believes that it has resolved its remaining issues with respect to HHS OIG and is positioned to
continue to participate in Federal health care programs now and in the future.

The Company has received a subpoena from the
State of California Department of Justice seeking documents with respect to ETHEXs NitroQuick product. In an email dated August 12, 2009, the California Department of Justice advised that after reading CMS Release 151, it might resolve
the subpoena that was issued. The Company provided limited information requested by the California Department of Justice on October 7, 2009, and on November 10, 2009 the California Department of Justice informed the Company that the
California Department of Justice is contemplating what additional information, if any, it will request.

On February 27,
2009, by letter, the Company was notified by the U.S. Department of Labor that it was conducting an investigation of the Companys Fifth Restated Profit Sharing Plan and Trust, to determine whether such plan is conforming with the provisions of
Title I of the Employee Retirement Income Security Act (ERISA) or any regulations or orders thereunder. The Company cooperated with the Department of Labor in its investigation and on August 27, 2009, the Department of Labor
notified the Company it had completed a limited review and no further review was contemplated at that time. On July 7, 2010, by letter, the U.S. Department of Labor notified the Company it was again conducting a review of the Companys
Fifth Restated Profit Sharing Plan and Trust. The Company provided the requested documents and has heard nothing further.

35

On February 3, 2009, plaintiff Harold Crocker filed a putative class-action complaint
against the Company in the United States District Court for the Eastern District of Missouri, Crocker v. KV Pharmaceutical Co., et al., No. 4-09-cv-198-CEJ. The Crocker case was followed shortly thereafter by two similar cases,
also in the Eastern District of Missouri (Bodnar v. KV Pharmaceutical Co., et al., No. 4:09-cv-00222-HEA, on February 9, 2009, and Knoll v. KV Pharmaceutical Co., et al., No. 4:09-cv-00297-JCH, on February 24,
2009). The two later cases were consolidated into Crocker so that only a single action now exists, and the plaintiffs filed a Consolidated Amended Complaint on June 26, 2009 (Complaint).

The Complaint purports to state claims against the Company and certain current and former employees for alleged breach of fiduciary
duties to participants in the Companys 401(k) plan. Defendants, including the Company and certain of its directors and officers, moved to dismiss the amended complaint on August 25, 2009, and briefing of those motions was completed on
October 19, 2009. The court granted the motion to dismiss the Company and all individual defendants on March 24, 2010. A motion to alter or amend the judgment and second amended consolidated complaint was filed on April 21, 2010. The
Company, on May 17, 2010, filed a Memorandum in Opposition to plaintiffs motion to alter or amend the judgment and for leave to amend the consolidated complaint. On October 20, 2010, the Court denied plaintiffs motion to alter
or amend the judgment and for leave to amend the complaint. Plaintiffs requested mediation and the Company agreed to this request. On February 15, 2011, during such mediation, this litigation was settled by an agreement in principle of the
parties for an amount equal to $3,000, payable in full from the Companys insurance coverage.

On December 2, 2008,
plaintiff Joseph Mas filed a complaint against the Company, in the United States District Court for the Eastern District of Missouri, Mas v. KV Pharma. Co., et al., Case No. 08-CV-1859. On January 9, 2009, plaintiff Herman Unvericht
filed a complaint against the Company also in the Eastern District of Missouri, Unvericht v. KV Pharma. Co., et al., Case No. 09-CV-0061. On January 21, 2009, plaintiff Norfolk County Retirement System filed a complaint against the
Company, again in the Eastern District of Missouri, Norfolk County Retirement System v. KV Pharma. Co., et al., Case No. 09-CV-00138. The operative complaints in these three cases purport to state claims arising under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of stock purchasers. On April 15, 2009, the Honorable Carol E. Jackson consolidated the Unvericht and Norfolk County cases into the Mas case already
before her. The amended complaint for the consolidated action, styled Public Pension Fund Group v. KV Pharma. Co., et al., Case No. 4:08-CV-1859 (CEJ), was filed on May 22, 2009. Defendants, including the Company and certain of its
directors and officers, moved to dismiss the amended complaint on July 27, 2009, and briefing was completed on the motions to dismiss on September 3, 2009. The court granted the motion to dismiss the Company and all individual defendants
in February 2010. On March 18, 2010, the plaintiffs filed a motion for relief from the order of dismissal and to amend their complaint, and also filed a notice of appeal. The Company filed its opposition to plaintiffs motion for relief
from judgment and to amend the complaint on April 8, 2010. Briefing was completed on April 29, 2010. On October 20, 2010, the Court denied plaintiffs motion for relief from the order of dismissal and to amend pleadings. On
November 1, 2010, plaintiffs filed a notice of appeal.

On October 2, 2009, the U.S. Equal Employment
Opportunity Commission sent the Company a Notice of Charge of Discrimination regarding a charge, dated September 23, 2009, of employment discrimination based on religion (in connection with the termination of his employment with the Company)
filed against the Company by David S. Hermelin, a current director and former Vice President, Corporate Strategy and Operations Analysis of the Company. On January 29, 2010, the Company filed its response to the Notice of Charge of
Discrimination, which stated the Companys position that Mr. D. Hermelins termination had nothing to do with religious discrimination and that his claim should be dismissed.

The Company and/or ETHEX are named defendants in at least 43 pending product liability or other lawsuits that relate to the
voluntary product recalls initiated by the Company in late 2008 and early 2009. The plaintiffs in these lawsuits allege damages as a result of the ingestion of purportedly oversized tablets allegedly distributed in 2007 and 2008. The
lawsuits are pending in federal and state courts in various jurisdictions. The 43 pending lawsuits include 9 that have settled but have not yet been dismissed. In the 43 pending lawsuits, two plaintiffs allege economic
harm, 29 plaintiffs allege that a death occurred, and the plaintiffs in the remaining lawsuits allege non-fatal physical injuries. Plaintiffs allegations of liability are based on various theories of recovery, including, but not
limited to strict liability, negligence, various breaches of warranty, misbranding, fraud and other common law and/or statutory claims. Plaintiffs seek substantial compensatory and punitive damages. Two of the
lawsuits are putative class actions, one of the lawsuits is on behalf of 29 claimants, and the remaining lawsuits are individual lawsuits or have two plaintiffs. The Company believes that these lawsuits are without merit and is
vigorously defending against them, except where, in its judgment, settlement is appropriate. In addition to the 43 pending lawsuits, there are at least 31 pending pre-litigation claims (at least 6 of which involve a death) that may or
may not eventually become lawsuits. The Company has also resolved a significant number of related product liability lawsuits and pre-litigation claims. In addition to self insurance, the Company possesses third party product liability
insurance, which the Company believes is applicable to the pending lawsuits and claims.

36

The Company and ETHEX are named as defendants in a complaint filed by CVS Pharmacy, Inc.
(CVS) in the United States District Court for the District of Rhode Island on or about February 26, 2010 and styled CVS Pharmacy, Inc. v. K-V Pharmaceutical Company and Ethex Corporation (No. CA-10-095) (CVS
Complaint). The CVS Complaint alleges three claims: breach of contract, breach of implied covenant of good faith and fair dealing, and, in the alternative, promissory estoppel. CVS claims are premised on the allegation that the Company
and/or ETHEX failed to perform their alleged promises to either supply CVS with its requirements for certain generic drugs or reimburse CVS for any higher price it must pay to obtain the generic drugs. CVS seeks damages of no less than $100,000,
plus interest and costs. The Company was served with the CVS Complaint on March 8, 2010. An Answer was filed on April 14, 2010. On June 2, 2010, the Company filed a Motion to Dismiss this action based on failure to join an
indispensible party and lack of standing. On July 21, 2010, CVS filed objections to the Companys Motion to Stay Discovery and Motion to Dismiss. On July 28, 2010, the Judge denied the Companys Motion to Stay Discovery pending
the Motion to Dismiss without issuing a decision. On January 28, 2011, the federal magistrate recommended that the Companys Motion to Dismiss the Complaint be granted. The plaintiff is filing a notice of objection to the magistrates
recommendation. In March 2011, CVS and its parent CVS Caremark Corporation filed a similar complaint, seeking damages similar to those sought in the federal case and adding another breach of contract claim, in state court in Superior Court of
Providence County, Rhode Island, against the Company, ETHEX and Nesher.

On July 29, 2010, the Company and FP1096, Inc.
filed an action in the U.S. District Court for the District of Delaware against Perrigo Israel Pharmaceuticals, Ltd., Perrigo Company and FemmePharma Holding Company, Inc. for infringement of U.S. Patent 5,993,856. A settlement was entered into
with Perrigo Israel Pharmaceuticals, Ltd. and Perrigo Company on December 16, 2010 and the case was dismissed.

Robertson
v. Ther-Rx Corporation, U.S. District Court for the Middle District of Alabama, Civil Case No. 2:09-cv-01010-MHT-TFM, filed October 30, 2009, by a Ther-Rx sales representative asserting non-exempt status and the right to overtime pay under
the Fair Labor Standards Act for a class of Ther-Rx sales representatives and under the Family and Medical Leave Act of 1993 (with respect to plaintiffs pregnancy) and Title VII of the Civil Rights Act of 1964 (also with respect to termination
allegedly due to her pregnancy and to her complaints about being terminated allegedly as a result of her pregnancy). An additional seven Ther-Rx sales representatives have joined as plaintiffs. Class certification arguments are pending
before the court. On December 22, 2010, a settlement in principle was reached between the parties.

The Company entered
into a License and Supply Agreement (Agreement) with Strides Arcolab and Strides, Inc. (collectively Strides) as well as a Share Purchase Agreement with Strides Arcolab on May 5, 2005. Strides purported to terminate the
Agreement on March 11, 2009 due to the Companys alleged failure to provide adequate assurances on its ability to perform under the Agreement to which the Company denied that the Agreement was terminated. On October 20, 2009, the
Company filed a Statement of Claim and Requests for Arbitration with the International Chamber of Commerce alleging that Strides had anticipatorily repudiated the Agreement. On January 26, 2010, Strides filed its Answer and Counterclaims
generally denying the allegations and on March 11, 2010, the Company filed its Answer generally denying Strides counterclaims. On December 13, 2010, the parties settled the arbitration by an agreed termination of the agreements
between the parties, Strides retaining all rights to the product development work done under the agreements, the Companys returning Strides stock certificates, and Strides paying the Company $7,250.

On October 13, 2009, the Company filed a Complaint in the United States District Court for the Eastern District of Missouri, Eastern
Division, against J. Uriach & CIA S.A. (Uriach) seeking damages for breach of contract and misappropriation of the Companys trade secrets and that Uriach be enjoined from further use of the Companys confidential
information and trade secrets. On September 28, 2010, the Court issued a Memorandum and Order granting defendants Motion to Dismiss for lack of personal jurisdiction of defendant, J. Uriach & CIA, S.A. The Company has appealed
the decision.

On August 24, 2010, Westmark Healthcare Distributors, Inc. filed an action in the Third Judicial District
Court IN and For Salt Lake County, State of Utah, against Ther-Rx demanding payment of $94 for recalled, returned pharmaceutical products.

On March 17, 2011, the Company was served with a complaint by the trustee in bankruptcy for Qualia Clinical Services, Inc. asserting a breach of contract claim for approximately $318 for certain
clinical work done by such Company.

From time to time, the Company is involved in various other legal proceedings in the
ordinary course of its business. While it is not feasible to predict the ultimate outcome of such other proceedings, the Company believes the ultimate outcome of such other proceedings will not have a material adverse effect on its results of
operations, financial condition or liquidity.

37

There are uncertainties and risks associated with all litigation and there can be no
assurance the Company will prevail in any particular litigation. During the nine months ended December 31, 2010 and 2009, the Company recorded expense of $8,653 and $5,003, respectively, for litigation and governmental inquiries. At
December 31, 2010 and March 31, 2010, the Company had accrued $50,804 and $46,450, respectively, for estimated costs for litigation and governmental inquiries.

17.

Income Taxes

The Company
has federal loss carry forwards of approximately $183,000 and state loss carry forwards of approximately $306,000 at December 31, 2010. The Company also has tax credit carry forwards for alternative minimum tax, research credit, and foreign tax
credit of approximately $9,640 at December 31, 2010. The loss carry forwards begin to expire in the year 2030, while the alternative minimum tax credits have no expiration date. The research credit and foreign tax credit begin to expire in the
year 2026 and 2017, respectively.

The federal loss carry forwards may be subject to limitation in future periods if there is
an ownership change in the stock of the Company. An ownership change occurs when the major shareholders have increased their ownership by more than 50 percentage points over a given period of time, which is typically a three-year testing period.
Normal trading in publicly held stock by shareholders who are not major shareholders does not trigger an ownership change. The Company is monitoring the holdings of its major shareholders to assess the likelihood of a potential ownership change.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers all significant available positive and negative evidence, including the existence of losses in recent years, the timing of deferred tax liability reversals, projected future taxable income, taxable income in carry back years,
and tax planning strategies to assess the need for a valuation allowance. Based upon the level of current taxable loss, projections for future taxable income over the periods in which the temporary differences are deductible, the taxable income in
available carry back years and tax planning strategies, management concluded that it was more likely than not that the Company will not realize the benefits of these deductible differences. The operating loss for the fiscal year ended March 31,
2009 exceeded the cumulative income from the two preceding fiscal years. The available carry back of this operating loss was not fully absorbed, which resulted in an operating loss carry forward. The Company established valuation allowances that
were charged to income tax expense in the fiscal years ended March 31, 2009 and March 31, 2010.

Management believes
that the operating loss reported for the three and nine months ended December 31, 2010 more likely than not will not create a future tax benefit. As such, a valuation allowance of $15,548 and $48,139 has been charged to income tax expense for
the three and nine months ended December 31, 2010, respectively. The Company has reported a provision for income taxes for the three and nine months ended December 31, 2010 due primarily to the timing of certain deferred tax liabilities
which are not scheduled to reverse within the applicable carry forward periods for the deferred tax assets. The provision also includes adjustments to unrecognized tax benefits related to activity occurring during the three and nine months ended
December 31, 2010.

The consolidated balance sheets reflect liabilities for unrecognized tax benefits of $2,021 and
$6,881 as of December 31, 2010 and March 31, 2010, respectively. Accrued interest and penalties included in the consolidated balance sheets were $506 and $945 as of December 31, 2010 and March 31, 2010, respectively. The
reduction of the liabilities and interest and penalties resulted from the settlement of an examination.

The Company
recognizes interest and penalties associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.

It is anticipated the Company will recognize approximately $810 of unrecognized tax benefits within the next 12 months as a result of the expected expiration of the relevant statute of limitations.

Management regularly evaluates the Companys tax positions taken on filed tax returns using information about recent
court decisions and legislative activities. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law, and the specific facts and circumstances of each matter. Because tax law and regulations
are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The recorded tax liabilities are based on
estimates and assumptions that have been deemed reasonable by management. However, if the Companys estimates are not representative of actual outcomes, recorded tax liabilities could be materially impacted.

38

On November 6, 2009, President Obama signed into law H.R. 3548, the Worker,
Homeownership, and Business Assistance Act of 2009. This new law provides an optional longer net operating loss carry back period and allows most taxpayers the ability to elect a carry back period of three, four or five years (the net operating loss
carry back period was previously limited to two years). This election can only be made for one year for net operating losses incurred for a tax year ended after December 31, 2007 and which began before January 1, 2010. The Company elected
to apply this extended carry back period to its tax year ended March 31, 2009. The Company elected a carry back period of five years. The Company filed an Application for Tentative Refund with the Internal Revenue Service for this additional
carry back period and subsequently received a refund in the amount of $23,754 in February, 2010.

18.

Subsequent Events

Approval of Makena®

On February 3, 2011, the Company was informed by Hologic that the FDA granted approval for Makena® and started shipping product in March 2011.

Hologic Agreement

The Company entered into an Amendment No. 1 to the Original Agreement with Hologic on January 8, 2010. On February 4, 2011, the Company entered into an Amendment No. 2 to the Original
Agreement.

The amendments set forth in Amendment No. 2 reduced the payment to be made on the Transfer Date to $12,500
and revised the schedule for making the remaining payments of $107,500.

Under the revised payment provisions set forth in
Amendment No. 2, after the $12,500 payment on the Transfer Date and a subsequent $12,500 payment twelve months after the Approval Date, the Company has the right to elect between the following two alternate payment schedules for the remaining
payments:

Payment Schedule 1:



A $45,000 payment 18 months after the Approval Date, plus a royalty equal to 5% of net sales of
Makena® made during the period from 12 months after the Approval Date to the date the $45,000 payment is made;



A $20,000 payment 21 months after the Approval Date;



A $20,000 payment 24 months after the Approval Date; and



A $10,000 payment 27 months after the Approval Date.

The royalties will continue to be calculated subsequent to the $45,000 milestone payment but dont have to be paid as long as the Company makes subsequent milestone payments when due.

Payment Schedule 2:



A $7,308 payment 18 months after the Approval Date, plus a royalty equal to 5% of net sales of
Makena® made during the period from 12 months after the Approval Date to 18 months after the Approval Date;



A $7,308 payment for each of the succeeding twelve months;



A royalty payable 24 months following the Approval Date equal to 5% of net sales of Makena® made during the period from 18 months after the Approval Date to 24 months after the Approval Date; and



A royalty payable 30 months following the Approval Date equal to 5% of net sales of Makena® made during the period from 24 months after the Approval Date to 30 months after the Approval Date.

Notwithstanding anything to the contrary in Amendment No. 2, however, the Company may make any of the foregoing payments on or
before their due dates, and the date on which the Company makes the final payment contemplated by the selected payment schedule will be the final payment date, after which no royalties will accrue.

Moreover, if the Company elects Payment Schedule 1 and thereafter elects to pay the $45,000 payment earlier than the 18-month deadline,
the royalties beginning after 12 months will cease to accrue on the date of the early payment. Additionally, the subsequent payments will be paid in three month intervals following the $45,000 payment date.

39

Lastly, if the Company elects Payment Schedule 1 and thereafter does not make any of the
milestone payments when due, Amendment No. 2 provides that no payment default will be deemed to occur, provided the Company timely pays the required royalties accruing in the quarter during which the milestone payment has become due but is not
paid.

Under the Indenture governing the 2011 Notes, the Company shall make a $45,000 payment on or prior
to the first anniversary of the Makena® NDA Approval Date; provided that notwithstanding the foregoing, the
Company shall have the ability to modify the amount or timing of such payment so long as the revised payment schedule (i) is not materially less favorable to security holders of the 2011 Notes than the royalty schedule under the Makena® agreement as in effect on the issue date of the 2011 Notes and (ii) does not increase the total payments to
Hologic during the term of the 2011 Notes.

Private Placement of Class A Common Stock

On February 14, 2011, the Company announced that it entered into a definitive agreement with a group of
institutional investors to raise approximately $32,300 of gross proceeds from a private placement of 9,950 shares of its Class A Common Stock at $3.25 per share. The transaction closed on February 17, 2011. The Company used $20,000 of the
proceeds from the financing to repay certain outstanding amounts and other outstanding obligations under its credit agreement with the Lenders. The remaining amount will be used for the launch of Makena®, payment of expenses associated with the transaction and general corporate purposes.

The Company will be required to pay certain cash amounts as liquidity damages of 1.5% of the aggregate purchase price of the shares that
are registerable securities per month if it does not meet certain obligations under the agreement with respect to the registration of shares.

Private Placement of 12% Senior Secured Notes

On March 17,
2011, the Company completed a private placement with a group of institutional investors of $225,000 aggregate principal amount of 12% Senior Secured Notes due 2015 (the 2011 Notes).

The 2011 Notes bear interest at an annual rate of 12% per year, payable semiannually in arrears on March 15 and
September 15 of each year, commencing September 15, 2011. The 2011 Notes will mature March 15, 2015. At any time prior to March 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 2011 Notes at a
redemption price of 112% of the principal amount of the 2011 Notes, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings. At any time prior to March 15, 2013, the Company may redeem
all or part of the 2011 Notes at a redemption price equal to (1) the sum of the present value, discounted to the redemption date, of (i) a cash payment to be made on March 15, 2013 of 109% of the principal amount of the 2011 Notes,
and (ii) each interest payment that is scheduled to be made on or after the redemption date and on or before March 15, 2013, plus (2) accrued and unpaid interest to the redemption date. At any time after March 15, 2013 and before
March 15, 2014, the Company may redeem all or any portion of the 2011 Notes at a redemption price of 109% of the principal amount of the 2011 Notes, plus accrued and unpaid interest to the redemption date. At any time after March 15, 2014,
the Company may redeem all or any portion of the 2011 Notes at a redemption price of 100% of the principal amount of the 2011 Notes, plus accrued and unpaid interest to the redemption date. The 2011 Notes are secured by the assets of the Company and
certain assets of its subsidiaries.

After an original issue discount of 3%, the Company received proceeds
of $218,300 which were used to fund a first year interest reserve totaling $27,000, repay all existing obligations to the Lenders totaling approximately $61,100 and pay fees and expenses associated with the Notes Offering of approximately $10,000.
In connection with these payments, the Company also terminated all future loan commitments with the Lenders. The remaining proceeds, totaling approximately $120,000 will be used for general corporate purposes, including the launch of Makena®.

The 2011 Notes were offered only to accredited investors pursuant to Regulation D under the Securities Act of 1933, as amended.

FDA inspections of KV

In February 2011, the FDA
conducted an inspection with respect to the Companys Clindesse® product and issued a Form 483 with certain
observations. On February 28, 2011, the Company filed its responses with the FDA with respect to such observations.

In March 2011, the FDA conducted an inspection with respect to adverse events. The inspection was completed without any observations
being issued by the FDA.

40

Generics Business

Management has committed to a plan to exit the Companys generics business. The Company will record its generics business as
discontinued operations in the quarter ending March 31, 2011.

19.

Warrant Liability

As
described in Note 12Long-Term Debt  U.S. Healthcare loan, the Company issued Warrants to U.S. Healthcare in November 2010 and March 2011 to purchase an aggregate of up to 20.1 million shares of Class A Common Stock
at an exercise price of $1.62 per share.

The Warrants expire November 17, 2015, but may be extended by up to two
additional years if the holders become subject to certain percentage ownership limitations that prevent their exercise in full at the time of their stated expiration. The Company must require that the holders exercise the Warrants before their
expiration if the average of the closing prices of the Class A Common Stock for at least 30 consecutive trading days exceeds $15.00, the closing prices of the Class A Common Stock have exceeded $15.00 for 10 consecutive trading days, the
shares issuable upon exercise may be resold under an effective registration statement or the resale is exempt from registration and the shares are listed on the NYSE or the National Association of Securities Dealers Automated Quotation. The Warrants
also contain certain non-standard anti-dilution provisions included at the request of U.S. Healthcare, pursuant to which the number of shares subject to the Warrants may be increased and the exercise price may be decreased. These anti-dilution
provisions are triggered upon certain sales of securities by the Company and certain other events. The Warrants do not contain any preemptive rights. The Warrants also contain certain restrictions on the ability to exercise the Warrants in the event
that such exercise would result in the holder of the Warrants owning greater than 4.99% of the shares of the Companys outstanding Class A Common Stock after giving effect to the exercise. The Warrants are exercisable solely on a cashless
exercise basis under which in lieu of paying the exercise price in cash, the holders will be deemed to have surrendered a number of shares of Class A Common Stock with market value equal to the exercise price and will be entitled to receive a
net amount of shares of Class A Common Stock after reduction for the shares deemed surrendered. In connection with the issuance of the Warrants, the Company agreed to register up to 20.1 million shares of our Class A Common Stock
issuable upon the exercise of the Warrants. (See Note 1  Description of Business  Restatement of Consolidated Financial Statements for further discussion on the Warrants.)

The calculation of the estimated fair value of the Warrants using a Monte Carlo simulation model requires application of critical
assumptions, including the possibility of a Fundamental Transaction occurring, reflecting conditions at each valuation date. The Company recomputes the fair value of the Warrants at the end of each quarterly reporting period using subjective input
assumptions consistently applied for each period. If the Company were to alter its assumptions or the numbers input based on such assumptions, the resulting estimated fair value could be materially different. (See Note 1  Description of
Business  Restatement of Consolidated Financial Statements for further discussion on the Warrants.)

The fair
value of the Warrants at November 17, 2010 and December 31, 2010 was estimated using the following assumptions (As Restated):

November 17,2010

December 31,2010

Underlying price of common stock per share

$

2.40

$

2.55

Exercise price per share

$

1.62

$

1.62

Risk-free interest rate

1.5

%

1.5

%

Dividend yield

None

None

Volatility

99.0

%

99.0

%

Expected life (in years)

5.0 years

4.9 years

Probability of a Fundamental Transaction (a)

10

%

10

%

(a)

After the stock price reaches $10.00 per share

41

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

Managements Discussion and Analysis and other sections of this Quarterly Report on Form 10-Q (Report) should be read in
conjunction with the consolidated financial statements and notes thereto. Except for historical information, the statements in this discussion and elsewhere in the Form 10-Q may be deemed to include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including financial, business environment and projections, as well as statements that are preceded by,
followed by, or that include the words believes, expects, anticipates, should or similar expressions, and other statements contained herein regarding matters that are not historical facts.
Additionally, the Report contains forward-looking statements relating to future performance, goals, strategic actions and initiatives and similar intentions and beliefs, including without limitation, statements regarding the Companys
expectations, goals, beliefs, intentions and the like regarding future sales, earnings, restructuring charges, cost savings, capital expenditures, acquisitions and other matters. These statements involve assumptions regarding the Companys
operations, investments, acquisitions and conditions in the markets the Company serves.

These risks, uncertainties and other
factors are under Part II, Item 1ARisk Factors and above under the caption CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS. In addition, the following discussion and analysis of financial condition and
results of operations, should be read in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and Item 7Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (2010 Form 10-K), and the unaudited interim consolidated financial statements and related notes to unaudited interim
consolidated financial statements included in Part I, Item 1 of this Report. Information provided herein for periods after December 31, 2010 is preliminary. As such, this information is not final or complete, and remains subject to change,
possibly materially.

Restatement of Consolidated Financial Statements

The Company issued warrants in November 2010 and March 2011 as described in Note 12Long-Term Debt  U.S. Healthcare
loan to the Notes to Consolidated Financial Statements (Note 12) in this Quarterly Report on Form 10-Q/A (the Warrants) to the Lenders.

The Company originally classified the Warrants as equity instruments from their respective issuance dates until the March 17, 2011 amendment of the Warrant provisions which added a contingency
feature and an escrow requirement as described in Note 12. At that date, the Warrants were revalued and reclassified from equity to liabilities. The Company also had originally used a Black-Scholes option valuation model to determine the
value of the Warrants. Upon a re-examination of the provisions of the Warrants issued in November 2010 and March 2011, the Company determined that the non-standard anti-dilution provisions contained in the Warrants require that (a) the
Warrants be treated as liabilities from their issuance date and (b) their value should be calculated utilizing a valuation model which considers the mandatory conversion features of the Warrants and the possibility that the Company may issue
additional common shares or common share equivalents that, in turn, could result in a change to the number of shares issuable upon exercise of the Warrants and the related exercise price. As a result, the Company has revalued the warrants from the
date of issuance using a Monte Carlo simulation model.

As a result of the foregoing, on November 7, 2011, the Audit
Committee of our Board of Directors, upon the recommendation from management, determined that the previously issued consolidated financial statements included in our Original Form 10-K and in our Quarterly Reports on Form 10-Q for the quarters ended
December 31, 2010 and June 30, 2011 and should not be relied upon. The restatements did not change the Companys reported cash and cash equivalents, operating expenses, operating losses or cash flows from operations for any period or
date. This Report contains the restated financial statements as of and for the quarter and nine months ended December 31, 2010.

The adjustments made as a result of the Restatement are more fully discussed in Note 1  Description of BusinessRestatement of Consolidated Financial Statements in the Notes to
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q/A.

Overview

Unless the context otherwise indicates, when we use the words we, our, us, our Company or
KV we are referring to K-V Pharmaceutical Company and its wholly-owned subsidiaries, including Ther-Rx Corporation (Ther-Rx),

42

Nesher Pharmaceuticals, Inc (Nesher), Ethex Corporation (ETHEX) and
Particle Dynamics, Inc. (PDI). Unless otherwise noted, when we refer to a specific fiscal year, we are referring to our fiscal year that ended on March 31 of that year. (For example, fiscal year 2010 refers to the fiscal year ended
March 31, 2010.)

We are a fully integrated specialty pharmaceutical company that develops, manufactures, acquires and
markets technologically-distinguished branded and generic/non-branded prescription pharmaceutical products. We have a broad range of dosage form manufacturing capabilities, including tablets, capsules, creams, liquids and ointments. We conduct our
branded pharmaceutical operations through Ther-Rx and our generic/non-branded pharmaceutical operations through Nesher, which focuses principally on technologically-distinguished generic products.

Our original strategy was to engage in the development of proprietary drug delivery systems and formulation
technologies which enhance the effectiveness of new therapeutic agents and existing pharmaceutical products. Today we utilize several of those technologies, such as SITE RELEASE® and oral controlled release technologies, in our branded and generic products.

As a result of the decision by the Company to sell PDI, the Company entered into an Asset Purchase Agreement selling to the purchaser certain assets associated with the business of PDI. Additionally, the
Company sold intellectual property and other assets related to our Sucralfate ANDA submitted to the FDA for approval. See additional discussion of the sale under Note 15Divestitures of this Report. The Company completed the sale of
these assets on June 2, 2010 and May 7, 2010, respectively.

As more fully described in our 2010 Form 10-K certain
events occurred during fiscal year 2009 and 2010 which had a material adverse effect on our financial results for the fiscal year ended March 31, 2010 and continue to have an effect for the three and nine-month period ended December 31,
2010.

On February 3, 2011, we were informed that the U.S. Food and Drug Administration
(FDA) granted approval for Makena®. The Company has contracted with a third party to manufacture
Makena®.

We continue to work closely with the FDA to return approved products to the market.

Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree

As more fully described in our 2010 Form 10-K, we have suspended manufacturing and shipment of products, except for products we distribute, but do not manufacture and which we do not generate a
significant amount of revenue. In addition, we entered into a consent decree with the FDA regarding our drug manufacturing and distribution. As part of the consent decree we have agreed not to directly or indirectly do or cause the manufacture,
process, packing, holding, introduction or delivery for introduction into interstate commerce at or from any of our facilities of any drug, until we have satisfied certain requirements designed to demonstrate compliance with the FDAs current
good manufacturing practice (cGMP) regulations. We have begun the process for resumption of product shipment and during the third quarter of 2010 began shipping our first product reintroduced to the market, Potassium Chloride ER
Capsules.

The steps taken by us in connection with the nationwide recall and suspension of shipment of all products
manufactured by us and the requirements under the consent decree have had, and are expected to continue to have, a material adverse effect on our results of operations. We do not expect to generate any significant revenues from products that we
manufacture until we can resume shipping certain or many of our approved products. In the meantime, we must meet ongoing operating costs related to our employees, facilities and FDA compliance, as well as costs related to the steps we are currently
taking to prepare for introducing or reintroducing our products to the market. If we are not able to obtain the FDAs clearance to resume manufacturing and distribution of more of our approved products in a timely manner and at a reasonable
cost, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

Workforce Reduction and Cost Conservation Actions

On March 30, 2010,
we committed to a plan to reduce our employee workforce from 682 to 394 employees. On March 31, 2010, we implemented the plan. On February 25, 2011, the Company further reduced its workforce by 11 and laid off an additional 41 employees.
On February 28, 2011, the size of our workforce was approximately 300 employees. The reduction in our workforce is a part of our efforts to conserve our cash and financial resources while we continue working with the FDA to return approved
products to market.

On September 13, 2010, we implemented a mandatory salary reduction program for all exempt personnel,
ranging from 15% to 25% of base salary, in order to conserve our cash and financial resources. In March 2011, the salaries of exempt personnel were reinstated.

43

Results of Operations

Net revenues for the three months ended December 31, 2010 decreased $142.1 million, or 96.3%, as compared to the
three months ended December 31, 2009. The decrease in net sales was primarily due to the sales of $143.0 million of certain generic versions of OxyContin® pursuant to a Distribution and Supply Agreement with Purdue Pharma L.P., The P.F. Laboratories, Inc and Purdue Pharmaceuticals L.P. (the Distribution
Agreement) that occurred during the three months ended December 31, 2009. Pursuant to the Distribution Agreement we were supplied with a limited quantity of product to be distributed during a limited period.

During the three months ended December 31, 2009, the Company received and sold to its customers all of the
generic OxyContin® as specified under the Distribution Agreement.

Net revenues for the nine months ended December 31, 2010 decreased $144.9 million, or 92.3%, as compared to the
nine months ended December 31, 2009. The decrease in net revenues for the nine months ended December 31, 2010 compared to nine months ended December 31, 2009 was primarily a result of the sale of certain generic versions of OxyContin® previously described above.

Operating expenses for the three months ended December 31, 2010 increased $2.4 million or 9.3%, as compared to
the three months ended December 31, 2009. The increase was due to the gain on sale for $14.0 million of our first-to-file Paragraph IV ANDA with the FDA for generic equivalent version of GlaxoSmithKlines Duac® gel to Perrigo recorded in the three months ended December 31, 2009 offset by lower personnel costs and branded
marketing and promotion expenses in 2010.

Operating expenses decreased $27.2 million, or 23.4% as
compared to the nine months ended December 31, 2009. The decrease in operating expenses was primarily due to decreases in personnel costs, branded marketing and promotion expense, litigation and governmental inquiry costs related to actual and
probable legal settlements and government fines, selling and administrative, restructuring and research and development expenses In addition, during the three months ended June 30, 2010, the Company recognized a gain on sale of certain
intellectual property and other assets related to our ANDA, submitted with the FDA for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension of $11.0 million. This year-to-date gain was offset by the gain of
$14.0 million for the generic equivalent version of GlaxoSmithKlines Duac® gel to Perrigo Company that
occurred in the three months ended December 31, 2009.

Net Revenues by Segment

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Branded products

$

3,979

$

3,065

$

914

29.8

%

$

11,200

$

11,287

$

(87

)

0.8

%

as % of net revenues

73.4

%

2.1

%

92.5

%

7.2

%

Specialty generics/non-branded

1,431

144,415

$

(142,984

)

(99.0

)%

893

145,733

(144,840

)

(99.4

)%

as % of net revenues

26.4

%

97.9

%

7.4

%

92.8

%

Other

10



10

N/A

10

7

3

42.9

%

Total net revenues

$

5,420

$

147,480

$

(142,060

)

(96.3

)%

$

12,103

$

157,027

$

(144,924

)

(92.3

)%

Net revenues for branded products in the three and nine months ended
December 31, 2010 and 2009 were primarily comprised of Evamist® and license revenue recorded in the first
quarter of 2009. Sales of Evamist® in the quarter ended December 31, 2010 were $0.4 lower than the quarter
ended December 31, 2009 due to lower selling prices and volumes which was offset by an increase in sales for the third quarter due to sales of Micro-K which we began shipping in September 2010 and an increase in royalty revenue.

The decreases in branded products net revenue in the nine months ended December 31, 2010 as compared to the nine
months ended December 31, 2009 was primarily due to $3.5 million recorded during the first quarter of 2009 as license revenue related to the transfer of certain existing product registrations, manufacturing technology and intellectual property
rights. Excluding the license revenue, net revenues were $7.8 million for the nine months ended December 2009. The increase in branded product net revenue, excluding the license revenue, was due to Evamist® which had both higher volumes and average selling prices in the nine months ended December 31, 2010 compared to
nine months ended December 31, 2009. In addition, the year-to-date increase was also attributed to Micro-K which we began shipping in September 2010.

44

The decrease in specialty generics/non-branded revenues for the quarter
and year-to-date ended December 31, 2010 compared to the quarter and year-to-date ended December 31, 2009 was due to the sale of certain generic versions of OxyContin® described above in results to operations that occurred in the third quarter of 2009.

Gross Profit (Loss) by Segment

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Branded products

$

3,553

$

2,593

$

960

37.0

%

$

9,817

$

9,757

$

60

0.6

%

as % of segment net revenues

89.3

%

84.6

%

87.7

%

86.4

%

Specialty generics/non-branded

1,214

123,001

(121,787

)

(99.0

)%

673

123,133

(122,460

)

(99.5

)%

as % of segment net revenues

84.8

%

85.2

%

75.4

%

84.5

%

Other

(6,680

)

(15,166

)

8,486

(56.0

)%

(24,655

)

(41,713

)

17,058

(40.9

)%

Total gross profit (loss)

$

(1,913

)

$

110,428

$

(112,341

)

(101.7

)%

$

(14,165

)

$

91,177

$

(105,342

)

(115.5

)%

as % of total net revenues

(35.3

)%

74.9

%

(117.0

)%

58.1

%

The increase in gross profit for branded products in the three months ended
December 31, 2010 compared to the three months ended December 31, 2009 was primarily related to increased sales of Micro-K, which began shipping in September 2010 and royalty revenue of $0.9 million recorded in the three months ended
December 31, 2010. The increase in gross profit for branded products for the nine months ended December 31, 2010 compared to the nine months ended December 31, 2009 was impacted by $3.5 million of license revenue recorded in the nine
months ended December 31, 2009. Excluding the license revenue, gross profit was $6.3 million for the nine months ended December 31, 2009. Excluding the license revenue, the gross profit increased by $3.5 million primarily due to higher
prices and volumes for Evamist®, sales of Micro-K that started shipping in September 2010 and increased royalty
revenue of $0.4 million.

The decrease in specialty generics/non-branded gross profit for the three and
nine months ended December 31, 2010 compared to the three and nine months ended December 31, 2009 was due to the sale of certain generic versions of OxyContin® described above in the third quarter of 2009.

The Other category reflected above includes the impact of contract manufacturing revenues, pricing and products variance and changes in inventory reserves associated with production. Since we
did not produce product during the three and nine month periods ended December 31, 2010, labor and overhead expenses are recognized directly into cost of sales. The lower gross loss is primarily due to lower personnel cost due to restructuring
activities. All production expenses were expensed as incurred.

Research and Development

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Research and development

$

4,236

$

7,273

$

(3,037

)

(41.8

)%

$

16,999

$

24,727

$

(7,728

)

(31.3

)%

as % of net revenues

78.2

%

4.9

%

140.5

%

15.7

%

Research and development expenses consist mainly of personnel-related costs and preclinical tests for
proposed branded products, clinical studies to determine the safety and efficacy of proposed branded products, and material used in research and development activities. The decrease in research and development expense of $3.0 million and $7.7
million for the three and nine month periods ended December 31, 2010, respectively, as compared to the three and nine month periods ended December 31, 2009 was primarily due to lower personnel costs associated with the reduction in our
work force discussed above that occurred in the fourth quarter of fiscal year 2010 and lower costs associated with the testing of drugs under development. The number of our research and development personnel was 58% lower, on average, at
December 31, 2010, as compared to December 31, 2009.

45

Selling and Administrative

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Selling and administrative

$

24,208

$

33,101

$

(8,893

)

(26.9

)%

$

74,330

$

101,013

$

(26,683

)

(26.4

)%

as % of net revenues

446.6

%

22.4

%

614.1

%

64.3

%

The decrease in selling and administrative expense (S&A) for the three months ended December 31,
2010 compared to the three months ended December 31, 2009 resulted primarily from the net impact of the following:



$1.6 million decrease in personnel expenses due to the substantial reduction of our workforce in March, 2010;



$1.2 million decrease in FDA review expenses due to the steps taken by us in connection with the FDAs inspectional activities, the consent
decree, litigation and governmental inquiries;



$2.8 million decrease in branded and non-branded product marketing expenses due to the discontinuation of various products; and



Included in selling and administrative expenses was amortization expense of $1.2 million in 2010 compared to amortization expense of $3.0 million in
2009, respectively. The decrease in amortization expense was due to the $82.3 million impairment charge recorded in fiscal year 2010 for Evamist, Mico-K and our Manufacturing, Distribution & Packaging asset group and is more fully described
in our 2010 Form 10-K.

The decrease in S&A for the nine months ended December 31, 2010 compared to
the nine months ended December 31 2009 resulted primarily from the net impact of the following:



$5.6 million decrease in personnel expenses due to the substantial reduction of our workforce in March, 2010;



$8.6 million decrease in branded and non-branded product marketing expenses due to the discontinuation of various products;



$6.9 million decrease in FDA review expenses due to a decrease in litigation activity coupled with the steps taken by us in connection with the
FDAs inspectional activities, the consent decree, litigation and governmental inquiries; and



Included in selling and administrative expenses is amortization expense of $3.7 million in 2010 compared to amortization expense of $8.9 million in
2009, respectively. The $5.2 million decrease in amortization expense was due to the $82.3 million impairment charge recorded in fiscal year 2010.

We test the carrying value of long-lived assets for impairment at least annually and also assess and evaluate on a quarterly basis if any events have occurred which indicate the possibility of impairment.
During the assessment as of December 31, 2010, we did not identify any events that were indicative of impairment. However, any significant changes in actual future results from the assessment used to perform the quarterly evaluation, such as
lower sales, increases in production costs, technological changes or decisions not to produce or sell products, could result in impairment or change in expected proceeds from the sales of our businesses at a future date (see Note 2Basis
of Presentation of the Notes to the Consolidated Financial Statements in this Report).

Loss (Gain) on Sale of
Assets

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Gain on sale of assets

$



$

(14,500

)

$

14,500

(100.0

)%

$

(10,938

)

$

(14,500

)

$

3,562

(24.6

)%

as % of net revenues

0.0

%

(9.8

)%

(90.4

)%

(9.2

)%

The Company recognized a gain on sale of certain intellectual property and other
assets related to our ANDA, submitted with the FDA for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension of $11.0 million in 2010. All activities related to the intellectual property of 1gm/10mL
sucralfate suspension were expensed as incurred resulting in a gain equal to the cash proceeds received. This year-to-date gain was offset by the gain of $14.0 million for the sale of the generic equivalent version of GlaxoSmithKlines Duac® gel to Perrigo Company that occurred in the third quarter of 2009.

46

Litigation and Governmental Inquiries, net

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Litigation and governmental inquiries

$



$

150

$

(150

)

(100.0

)%

$

8,653

$

5,003

$

3,650

73.0

%

as % of net revenues

0.0

%

0.1

%

71.5

%

3.2

%

The increase in expense of $3.7 million for the nine months ended December 31, 2010 compared to the
nine months ended December, 31 2009 was primarily related to the estimated settlement of the HHS OIG matter and for various pending legal cases. (see Note 16Commitments and Contingencies of the Notes to the Consolidated Statements
in this Report)

Extinguishment of Debt

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

(As Restated)

2009

$

%

2010

2009

$

%

Loss on extinguishment of debt

$

9,418

$



$

9,418

N/A

$

9,418

$



$

9,418

N/A

as % of net revenues

173.8

%

0.0

%

77.8

%

0.0

%

In November 2010, the Company entered into a senior secured debt financing arrangement with U.S.
Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C. which retired an existing $20.0 million loan. At the time the $20.0 million loan was retired, the Company wrote-off a proportionate share of the fair value of warrants of $7.5 million that were
allocated to this loan. We also wrote-off approximately $1.9 million of deferred financing costs related to the $20.0 million loan. (See Note 12Long-Term Debt of the Notes to the Consolidated Statements in this Report).

Change in warrant liability

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

(As Restated)

2009

$

%

2010

(As Restated)

2009

$

%

Change in warrant liability

$

1,510

$



$

1,510

N/A

$

1,510

$



$

1,510

N/A

as % of net revenues

27.9

%

0.0

%

12.5

%

0.0

%

The change in warrant liability is a result of the mark to market adjustment of the warrant liability
from their issuance dates to December 2010.

Interest Expense, net and other

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

(As Restated)

2009

$

%

2010

2009

$

%

Interest expense, net

$

3,948

$

1,226

$

2,722

222.0

%

$

8,349

$

3,752

$

4,597

122.5

%

as % of net revenues

72.8

%

0.8

%

69.0

%

2.4

%

Interest expense, net and other includes interest expense, interest income and other income and expense
items. The increase in interest expense, net and other for the three months ended December 31, 2010 as compared to the three months ended December 31, 2009 resulted primarily from higher debt and interest costs.

47

The increase of $4.6 million in interest expense, net and other, for the nine months ended
December 31, 2010 compared to the nine months ended December 31, 2009, was due to higher debt, interest costs and lower investment interest income due to lower yields offset by the recognition of a foreign currency transaction gain of
approximately $0.9 million in the prior year and dividend income of $0.7 million related to an investment for the year ended December 31, 2009.

Income Tax Provision (Benefit)

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Income tax provision (benefit)

$

2,559

$

(24,157

)

$

26,716

110.6

%

$

2,508

$

(23,807

)

$

26,315

110.5

%

Effective tax rate

(5.8

)%

(29.0

)%

(2.1

)%

82.6

%

The provision for income taxes for the three and nine months ended December 31, 2010 was primarily
due to the timing of certain deferred tax liabilities which are not scheduled to reverse within the applicable carry forward periods for deferred tax assets offset by a valuation allowance adjustment reflected in continuing operations.

The benefit for income taxes for the three and nine months ended December 31, 2009 was primarily due to the additional carry back
period allowed as a result of a change in law, offset in part by the timing of certain deferred tax liabilities which are not scheduled to reverse within the applicable carryforward periods for deferred tax assets. We recorded a valuation allowance
in all periods which offset the tax benefits associated with the net losses for the same periods.

Discontinued Operations

Three Months EndedDecember 31,

Change

Nine Months EndedDecember 31,

Change

($ in thousands):

2010

2009

$

%

2010

2009

$

%

Income from discontinued operations

$



$

1,252

$

(1,252

)

(100.0

)%

$

2,211

$

4,609

$

(2,398

)

(52.0

)%

Gain on sale of discontinued operations

$



$



$



N/A

$

5,874

$



$

5,874

N/A

During the fourth quarter of fiscal year 2009, our Board authorized management to sell PDI, our specialty
materials segment (see Note 15Divestiture of the Notes to the Consolidated Financial Statements in this Report for more information regarding the sale of PDI). Therefore, we have segregated PDIs operating results and
presented them separately as a discontinued operation for all periods presented. (See Note 14Segment Reporting of the Notes to the Consolidated Financial Statements included in this Report) The Company sold PDI on June 2, 2010
and recognized a gain of $5.9 million, net of tax.

Liquidity and Capital Resources

Cash and cash equivalents and working capital (deficiency) were $31.7 million and $(131.2 million), respectively, at December 31,
2010, compared to $60.7 million and ($81.1 million), respectively, at March 31, 2010. Working capital is defined as total current assets minus total current liabilities. Working capital decreased primarily due to decreases in cash and cash
equivalents of $29.0 million, net current assets held for sale of $7.3 million and an increase in short-term debt of $43.9 million, offset by decreases in accounts payable of $12.4 million and accrued liabilities of $10.1 million. The decrease in
accounts payable was primarily due to timing of payment to our vendors and overall lower operating costs compared to a year ago. The decrease in accrued liabilities was due to payments associated with product recall processing fees, litigation
settlements and legal and consulting fees associated with the FDA consent decree and governmental inquiries and reduction in headcount. The increase in short-term debt was primarily due to the $60.0 million loan from U.S. Healthcare I, L.L.C. and
U.S. Healthcare II, L.L.C., net of the discount associated with the fair value of the warrants that were issued with this debt.

For the nine months ended December 31, 2010, net cash used in operating activities of $124.3 million resulted primarily from
decreases in accounts payable and accrued liabilities which was primarily driven by recall-related costs (including product costs, product returns, failure to supply claims and third-party processing fees) processed in the current year and the
decline in sales-related reserves that are classified as accrued liabilities which was primarily driven by the cessation of all of our manufacturing operations which occurred in the fourth quarter of fiscal year 2009. This was further coupled with a
net loss of $116.9 million, an increase in receivables and inventories, partially offset by non-cash items and the receipt of tax refunds.

48

For the nine months ended December 31, 2010, net cash flow provided by investing
activities of $39.3 million included the $11.0 million cash proceeds pursuant to the sale of Sucralfate and $22.0 million related to the sale of PDI, net of fees and the amount held in escrow. Additionally, the Company received approximately $3.5
million in insurance proceeds related to a fire that occurred in 2009 at PDI.

For the nine months ended December 31,
2010, net cash provided by financing activities of $56.0 million resulted primarily from proceeds of $60.0 million received from U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C, net of the loan discount, and from redemptions from its
collateralized borrowings offset by mortgage payments.

At December 31, 2010, our investment securities included $69.2
million in principal amount of auction rate securities (ARS). Consistent with our investment policy guidelines, the ARS held by us are AAA-rated securities with long-term nominal maturities secured by student loans which are guaranteed
by the U.S. Government. Liquidity for the ARS is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, typically between seven to 35 days. However, with
the liquidity issues experienced in global credit and capital markets, the ARS experienced failed auctions beginning in February 2008 and throughout fiscal years 2009 and 2010. An auction failure means that the parties wishing to sell their
securities could not be matched with an adequate volume of buyers. The securities for which auctions have failed continue to accrue interest at the contractual rate and continue to be auctioned every seven, 14, 28 or 35 days, as the case may be,
until the auction succeeds, the issuer calls the securities, or they mature. (See Note 7Investment Securities of the Notes to the Consolidated Financial Statements included in this Report for more information regarding the
settlement agreement and the proceeds received in connection therewith.)

Our debt balance, including current maturities, was
$353.2 million at December 31, 2010, excluding discount on loan, compared to $297.1 million at March 31, 2010. The balances include a $59.2 million and $61.2 million collateralized obligation related to our ARS at December 31, 2010
and March 31, 2010, respectively.

In March 2006, we entered into a $43.0 million mortgage loan arrangement with LaSalle
National Bank Association, in part to refinance $9.9 million of existing mortgages. The $32.8 million of net proceeds we received from the mortgage loan was used for working capital and general corporate purposes. The mortgage loan, which is secured
by four of our buildings, bears interest at a rate of 5.91% (and a default rate of 10.905%) and matures on April 1, 2021. We were not in compliance with one or more of the requirements of the mortgage loan arrangement as of March 31, 2010.
However, on August 5, 2010, we received a letter (Waiver Letter) approving certain waivers of covenants under the Promissory Note, dated March 23, 2006, by and between MECW, LLC, a subsidiary of our Company, and LaSalle
National Bank Association, and certain other loan documents entered into in connection with the execution of the Promissory Note (collectively, the Loan Documents). LNR Partners, Inc., the servicer of the loan (LNR Partners),
issued the Waiver Letter to our Company and MECW, LLC on behalf of the lenders under the Loan Documents. In the Waiver Letter, the lenders consented to the following under the Loan Documents:



Waiver of the requirement that our Company and MECW, LLC deliver audited balance sheets, statements of income and expenses and cash flows;



Waiver of the requirement that we certify financials delivered under the Loan Documents;



Waiver of the requirement that we deliver to the lenders Form 10-Ks within 75 days of the close of the fiscal year, Form 10-Qs within 45 days of the
close of each of the first three fiscal quarters of the fiscal year, and copies of all IRS tax returns and filings; and



Waiver, until March 31, 2012, of the requirement that we maintain a net worth, as calculated in accordance with the terms of the Loan Documents,
of at least $250 million on a consolidated basis.

With respect to the waiver of the requirement to deliver
Form 10-Ks and Form 10-Qs, we agreed to bring our filings current effective with the submission of our Form 10-Q for the quarter ended December 31, 2010 and become timely on a go- forward basis with the filing of our Form 10-K for the fiscal
year ending March 31, 2011. This waiver applies to our existing late filings.

In addition to the waivers, LNR Partners
also agreed to remove our subsidiaries ETHEX and PDI as guarantors under the Loan Documents and to add Nesher as a new guarantor under the Loan Documents. Under the terms of the Waiver Letter, we paid LNR Partners a consent fee of $25 related to the
waivers and legal retainer fees of $10 related to the changes in guarantors under the Loan Documents.

Since we received the
Waiver Letter for the loan requirements as to which we were not in compliance, the mortgage debt obligation that remained outstanding under the mortgage arrangement was classified as a long-term liability at December 31, 2010 and March 31,
2010.

49

In May 2003, we issued $200.0 million principal amount of 2.5% Contingent Convertible
Subordinated Notes (the Notes) that are convertible, under certain circumstances, into shares of our Class A Common Stock at an initial conversion price of $23.01 per share. The Notes bear interest at a rate of 2.50% and mature on
May 16, 2033. We are also obligated to pay contingent interest at a rate equal to 0.5% per annum during any six-month period commencing May 16, 2006, if the average trading price of the Notes per $1,000 principal amount for the
five-trading day period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. We may redeem some or all of the Notes at any time on or after May 21, 2006, at a redemption
price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of redemption. Holders may require us to repurchase all or a portion of their Notes on
May 16, 2013, 2018, 2023 and 2028, or upon a change in control, as defined in the indenture governing the Notes, at 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date
of repurchase, payable in cash. Holders had the right to require us to repurchase all or a portion of their Notes on May 16, 2008 and, accordingly, we classified the Notes as a current liability as of March 31, 2008. Since no holders
required us to repurchase all or a portion of their Notes on May 16, 2008 and because the next date holders may require us to repurchase all or a portion of their Notes is May 16, 2013, the Notes were classified as a long-term liability.

In December 2005, we entered into a financing arrangement with St. Louis County, Missouri related to expansion of our
operations in St. Louis County. Up to $135.5 million of industrial revenue bonds could have been issued to us by St. Louis County relative to capital improvements made through December 31, 2009. This agreement provides that 50% of the real and
personal property taxes on up to $135.5 million of capital improvements will be abated for a period of ten years subsequent to the property being placed in service. Industrial revenue bonds totaling $129.9 million were outstanding at
December 31, 2010 and March 31, 2010, respectively. The industrial revenue bonds are issued by St. Louis County to us upon our payment of qualifying costs of capital improvements, which are then leased by us for a period ending
December 1, 2019, unless earlier terminated. We have the option at any time to discontinue the arrangement and regain full title to the abated property. The industrial revenue bonds bear interest at 4.25% per annum and are payable as to
principal and interest concurrently with payments due under the terms of the lease. We have classified the leased assets as property and equipment and have established a capital lease obligation equal to the outstanding principal balance of the
industrial revenue bonds. Lease payments may be made by tendering an equivalent portion of the industrial revenue bonds. As the capital lease payments to St. Louis County may be satisfied by tendering industrial revenue bonds (which is our
intention), the capital lease obligation, industrial revenue bonds and related interest expense and interest income, respectively, have been offset for presentation purposes in the consolidated financial statements.

In September 2010 we entered into an agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C., affiliates of Centerbridge
Partners L.P. (the Lenders) for a loan of $20 million which was subsequently retired in November 2010 when we entered into a new agreement with the Lenders for a senior secured debt financing package for up to $120 million which was
subsequently amended in January 2011 and again in March 2011. In March 2011, the Company repaid in full all the remaining obligations with the Lenders and terminated the future loan commitments. (See Note 12Long-Term Debt for a
description of the financing with the Lenders and see Note 18Subsequent Events of the Notes to the Consolidated Financial Statements in this Report for a description of our $32.3 million private placement of Class A Common
Stock and $225 million private placement of 12% Senior Secured Notes a portion of the proceeds of which were used to repay the loan obligations with the Lenders.)

Ability to Continue as a Going Concern

There is substantial doubt about
our ability to continue as a going concern. Our Consolidated Financial Statements included in this Report on Form 10-Q are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. The historical consolidated financial statements included in this Report not include any adjustments that might be necessary if we are unable to continue as a
going concern. The report of our independent registered public accountants BDO USA, LLP, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, includes an explanatory paragraph related to our ability to continue
as a going concern.

The assessment of our ability to continue as a going concern was made by management considering, among
other factors: (i) the timing and number of approved products that will be reintroduced to the market and the related costs; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree
with the FDA; (iii) the possibility that we may need to obtain additional capital despite the senior loan we were able to obtain in March 2011 (see Note 18Subsequent Events of the Notes to the Consolidated Financial Statements
in this Report); (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16Commitments and Contingencies of the Notes to the Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q; and (v) our ability to comply with debt covenants. Our assessment was further affected by our fiscal year 2010 net loss of $283.6

50

million, our nine month ended December 31, 2010 net loss of $116.9 million and the outstanding balance of cash and cash equivalents of $31.7 million and $60.7 million as of December 31,
2010 and March 31, 2010, respectively. For periods subsequent to December 31, 2010, we expect losses to continue because we are unable to generate any significant revenues from more of our own manufactured products until we are able to
resume shipping more of our approved products and until after we are able to generate significant sales of
Makena® which was approved by the FDA in February 2011. We received notification from the FDA on
September 8, 2010 of approval to ship into the marketplace the first product approved under the consent decree, i.e., Potassium Chloride ER Capsule. We resumed shipment of extended release potassium chloride capsule, Micro-K® 10mEq and Micro-K® 8mEq, in September 2010, resumed shipments of generic version Potassium Chloride ER Capsule in December 2010 and we began shipping Makena® in March 2011. We are continuing to prepare other products for FDA inspection and do not expect to resume shipping
other products until fiscal year 2012, at the earliest. In addition, we must meet ongoing operating costs as well as costs related to the steps we are currently taking to prepare for introducing and reintroducing other approved products to the
market. If we are not able to obtain the FDAs clearance to resume manufacturing and distribution of more of our approved products in a timely manner and at a reasonable cost, or if revenues from the sale of approved products introduced or
reintroduced into the market place prove to be insufficient, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to
continue as a going concern.

Based on current financial projections, we believe the continuation of our
Company as a going concern is primarily dependent on our ability to address, among other factors: (i) the successful launch and product sales of Makena®
, which was approved by the FDA in February 2011; (ii) the timing, number and revenue generation of approved products that will be introduced or reintroduced to the market and the related costs; (iii) the suspension of
shipment of all products manufactured by us and the requirements under the consent decree with the FDA (other than the Potassium Chloride ER Capsule, including Micro-K® 10mEq and Micro-K® 8mEq,
products that are the subject of the FDA notification letter discussed above); (iv) the possibility that we will need to obtain additional capital. See Note 18Subsequent Events of the Notes to the Consolidated Financial
Statements in this Report for an update; (v) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16Commitments and Contingencies of the Notes to the Consolidated
Financial Statements included in this Report; and (vi) compliance with our debt covenants. While we address these matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs
associated with introducing or reintroducing approved products to the market (such as costs related to our employees, facilities and FDA compliance), remaining payments associated with the acquisition and retention of the rights to Makena® (see Note 5Acquisitions of the Notes to the Consolidated Financial Statements included in this
Report), the financial obligations pursuant to the plea agreement, costs associated with our legal counsel and consultant fees, as well as the significant costs, such as legal and consulting fees, associated with the steps taken by us in connection
with the consent decree and the litigation and governmental inquiries. If we are not able to obtain the FDAs clearance to resume manufacturing and distribution of certain or many of our approved products in a timely manner and at a reasonable
cost and/or if we are unable to successfully launch and commercialize Makena®, and/or if we experience adverse
outcomes with respect to any of the governmental inquiries or litigation described in Note 16Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in this Report, our financial position,
results of operations, cash flows and liquidity will continue to be materially adversely affected. See Item 1ARisk Factors included in this Report regarding additional risks we face with respect to these matters.

In the near term, we are focused on the following: (i) continuing the commercial launch of Makena®; (ii) meeting the requirements of the consent decree, which will allow our approved products to be reintroduced
to the market (other than the Potassium Chloride ER Capsule product, including Micro-K® 10mEq and Micro-K® 8mEq, products that are the subject of the FDA notification letter previously discussed); (iii) evaluating
strategic alternatives with respect to Nesher; and (iv) pursuing various means to minimize operating costs and increase cash. Since December 31, 2010, we have generated non-recurring cash proceeds to support our on-going operating and
compliance requirements from the agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C. for a $60.0 million loan (See Note 12Long-Term Debt), $32.0 million sale of our Class A Common Stock and private debt
placement of $225 million aggregate principal amount of 12% Senior Secured Notes due in 2015 (see Note 18Subsequent Events) in March 2011 (a portion of which was used to repay all existing obligations under the agreement with U.S.
Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C.). While these cash proceeds are expected to be sufficient to meet near term cash requirements, we are pursuing ongoing efforts to increase cash, including, but not limited to the continued
implementation of cost savings, exploration of strategic alternatives with respect to Nesher and the assets and operations of our generic products business and other assets and the return of certain of our approved products to market in a timely
manner or at all (other than the Potassium Chloride ER Capsule, including Micro-K® 10mEq and Micro-K® 8mEq products that are the subject of the FDA notification letter previously discussed). We cannot provide assurance
that we will be able to realize the cost reductions we anticipate from reducing our operations or our employee base, that some or many of our approved products can be returned to the market in a timely manner, that our higher profit approved
products will return to the market in the near term or that we can obtain additional cash through asset sales, a

51

successful commercial launch of Makena® or other means. If
we are unsuccessful in our efforts to introduce or return our products to market, or if needing to sell assets and raise additional capital in the near term, we will be required to further reduce our operations, including further reductions of our
employee base, or we may be required to cease certain or all of our operations in order to offset the lack of available funding.

We continue to evaluate the sale of certain of our assets. However, due to general economic conditions, we will likely be exposed to risks related to the overall macro-economic environment, including a
lower rate of return than we have historically experienced on our invested assets and being limited in our ability to sell assets. In addition, we cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of
such assets. Even if we are able to find purchasers, we may not be able to obtain attractive terms and conditions for such sales, including attractive pricing. In addition, divestitures of businesses involve a number of risks, including the
diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues and earnings associated with the divested business, and the disruption of operations in the affected business.
In addition, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure of significant financial and employee resources. Inability to consummate identified asset sales or manage the
post-separation transition arrangements could adversely affect our business, financial condition, results of operations and cash flows and ability to comply with the obligation of our outstanding debt.

Current and Anticipated Liquidity Position

At December 31, 2010, we had approximately $31.7 million in cash and cash equivalents. The cash balances at December 31, 2010 includes remaining loan availability that was provided under loan
agreements entered into on November 17, 2010, respectively, with the Lenders (see Note 12Long-Term Debt of the Notes to the Consolidated Financial Statements in this Report).

At December 31, 2010, we had $353.2 million of outstanding debt, excluding loan discounts, consisting of $200.0 million principal
amount of Notes, the remaining principal balance of a $43.0 million mortgage loan of $33.6 million, $59.3 million of collateralized borrowing, and $49.5 million principal amount of the loan entered into with the Lenders in November 2010, net of loan
discounts (this loan was repaid in full in March 2011 with the proceeds from a $32.3 million private placement of shares of Class A Common Stock and a portion of the proceeds from $225 million aggregate principal amount of 12% Senior Secured
Notes issued in a private placement (see Note 18Subsequent Events of the Notes to the Consolidated Financial Statements in this Report)).

On February 14, 2011, the Company announced that it entered into a definitive agreement with a group of institutional investors to raise approximately $32.3 million of gross proceeds from a private
placement of 9,950,000 shares of its Class A Common Stock at $3.25 per share. The transaction closed on February 17, 2011. The Company used $20.0 million of the proceeds from the financing to repay certain outstanding amounts and other
outstanding obligations under its credit agreement with the Lenders. The remaining amount will be used for the launch of
Makena® and payment of expenses associated with the transaction and general corporate purposes.

Additionally, the Company entered into an amendment to the Original Agreement with Hologic on January 8, 2010 (Amendment
No. 1). On February 4, 2011, the Company entered into a second amendment (Amendment No. 2) to the Original Agreement (see Note 18Subsequent Events of the Notes to the Consolidated Financial
Statements in this Report).

The amendments set forth in Amendment No. 2 reduced the payment to be made on the Transfer
Date to $12.5 million and revised the schedule for making the remaining payments of $107.5 million.

Under the revised payment
provisions set forth in Amendment No. 2, after the $12.5 million payment made on February 10, 2011 and a subsequent $12.5 million payment twelve months after the Approval Date, the Company has the right to elect between the following two
alternate payment schedules for the remaining payments:

Payment Schedule 1:



A $45.0 million payment 18 months after the Approval Date, plus a royalty equal to 5% of net sales of Makena® made during the period from 12 months after the Approval Date to the date the $45.0 million payment is made;



A $20.0 million payment 21 months after the Approval Date;



A $20.0 million payment 24 months after the Approval Date;



A $10.0 million payment 27 months after the Approval Date; and

52

The royalties will continue to be calculated subsequent to the $45.0 million milestone
payment but do not have to be paid as long as we make subsequent milestone payments when due.

Payment Schedule 2:



A $7.3 million payment 18 months after the Approval Date, plus a royalty equal to 5% of net sales of Makena® made during the period from 12 months after the Approval Date to 18 months after the Approval Date;



A $7.3 million payment for each of the succeeding twelve months;



A royalty payable 24 months following the Approval Date equal to 5% of net sales of Makena® made during the period from 18 months after the Approval Date to 24 months after the Approval Date; and



A royalty payable 30 months following the Approval Date equal to 5% of net sales of Makena® made during the period from 24 months after the Approval Date to 30 months after the Approval Date.

Notwithstanding anything to the contrary in Amendment No. 2, however, the Company may make any of the foregoing payments on or
before their due dates, and the date on which the Company makes the final payment contemplated by the selected payment schedule will be the final payment date, after which no royalties will accrue.

Moreover, if the Company elects Payment Schedule 1 and thereafter elects to pay the $45.0 million payment earlier than the 18-month
deadline, the royalties beginning after 12 months will cease to accrue on the date of the early payment. Additionally, the subsequent payments will be paid in three months intervals following the $45.0 million payment date.

Lastly, if the Company elects Payment Schedule 1 and thereafter does not make any of the milestone payments when due, Amendment
No. 2 provides that no payment default will be deemed to occur, provided the Company timely pays the required royalties accruing in the quarter during which the milestone payment has become due but is not paid.

Under the Indenture governing the $225 million aggregate principal amount of 12% Senior Secured Notes due 2015 (the
2011 Notes), the Company shall make a $45.0 million payment on or prior to the first anniversary of the
Makena® NDA Approval Date; provided that notwithstanding the foregoing, the Company shall have the ability to
modify the amount or timing of such payment so long as the revised payment schedule (i) is not materially less favorable to security holders of the 2011 Notes than the royalty schedule under the Makena® agreement as in effect on the issue date of the 2011 Notes and (ii) does not increase the total payments to
Hologic during the term of the 2011 Notes.

On March 17, 2011, we completed a private placement with a group of
institutional investors (the Notes Offering) of the Notes that generated approximately $218.3 million of net proceeds (see Note 18Subsequent Events included in this Report). A portion of the proceeds from the 2011 Notes
were used to repay existing obligations to the Lenders of approximately $61 million (which amount includes an applicable make-whole premium), establish a one year interest reserve for the 2011 Notes totaling $27 million, and pay fees and expenses
associated with the 2011 Notes of approximately $10 million. In connection with these payments, the Company also terminated all future loan commitments with the Lenders. Net cash provided to the Company from the Notes Offering, after payment of the
items noted above, was approximately $120 million. The Notes were offered only to accredited investors pursuant to Regulation D under the Securities Act of 1933, as amended.

Excluding payment of the items noted above with respect to the 2011 Notes, we project that during the quarter ending
March 31, 2011 our cash outlays will total approximately $50 million to $60 million, which includes a $12.5 million milestone payment made to Hologic on February 10, 2011 for the transfer of Makena® to the Company subsequent to its FDA approval on February 3, 2011. Of the remaining expected cash operating
expenditures of approximately $38 million to $48 million, approximately $28 million to $35 million relate to on-going operating expenses, approximately $3 million to $4 million relate to debt service payments and approximately $2 million to $3
million relate to legal and customer settlement payments. The remainder of the projected cash expenditures totaling approximately $5 million to $6 million is for costs related to our FDA compliance and other compliance related costs. Of the costs
described above for on-going operating expenses, legal and customer settlement payments and FDA compliance and other compliance related costs, we estimate that approximately 25% to 30% relates to our generics business and 70% to 75% relates to our
branded business and corporate related costs. We currently project that during the quarter ending March 31, 2011, these cash operating expenses will be offset by $10 million of net proceeds from the private placement completed on
February 17, 2011 and $15 million to $25 million from the collection of customer receivables and the monetization of certain non-core assets. Including the net cash provided from the Notes Offering, we expect that our cash balance at
March 31, 2011 will be in the range of $130 million to $140 million.

For periods subsequent to March 31, 2011, we
expect that our cash operating outlays, excluding milestone payments to Hologic and scheduled payments to the Department of Justice, will continue in the range noted above until we are able to divest the generics business. Our future cash inflows
will be generated primarily from collection of customer receivables and

53

loan proceeds. The majority of our cash inflow from customer collections for periods beyond March 31, 2011 is expected to be derived from sales of Makena®, which we began shipping in March 2011. Other collections from customer receivables will come from on-going sales of
Evamist® and sales of both the branded and generic versions of Potassium Chloride ER capsules. We also expect to
return Clindesse® and Gynazole-1® to the market during calendar year 2011. However, we are currently unable to predict the amount or timing of collections from sales of our products for periods beyond
March 31, 2011.

We are continuously reviewing our projected cash expenditures and are evaluating
measures to reduce expenditures on an ongoing basis. In addition, a top priority is to maintain and attempt to increase our limited cash and financial resources. As a result, if we determine that our current goal of meeting the consent decrees
requirements and returning our approved products to market is likely to be significantly delayed, we may decide, in addition to selling certain of our assets, to further reduce our operations, to significantly curtail some or all of our efforts to
meet the consent decrees requirements and return our approved products to market and/or to outsource to a third-party some or all of our manufacturing operations when and if we return our approved products to market. Such decision would be
made based on our ability to manage our near-term cash obligations, to obtain additional capital through asset sales and/or external financing and to expeditiously meet the consent decrees requirements and return our approved products to
market. If such decision were to be made, we currently anticipate that we would focus our management efforts on developing product candidates in our development portfolio that we believe have the highest potential return on investment, which we
currently believe to be primarily Makena®. We also expect to evaluate other alternatives available to us in
order to increase our cash balance.

Critical Accounting Estimates

Our Consolidated Financial Statements are presented on the basis of U.S. generally accepted accounting principles. Certain of our
accounting policies are particularly important to the presentation of our financial condition and results of operations and require the application of significant judgment by our management. As a result, amounts determined under these policies are
subject to an inherent degree of uncertainty. In applying these policies, we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates and judgments on
historical experience, the terms of existing contracts, observance of trends in the industry, information that is obtained from customers and outside sources, and on various other assumptions that we believe to be reasonable and appropriate under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that our estimates and assumptions are reasonable,
actual results may differ significantly from our estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operations and/or financial condition.

Intangible and Other Long-Lived Assets

Our intangible assets principally consist of product rights, license agreements and trademarks resulting from product acquisitions and legal fees and similar costs relating to the development of patents
and trademarks. Intangible assets that are acquired are stated at cost, less accumulated amortization, and are amortized on a straight-line basis over their estimated useful lives, which range from nine to 20 years. We determine amortization periods
for intangible assets that are acquired based on our assessment of various factors impacting estimated useful lives and cash flows of the acquired products. Such factors include the products position in its life cycle, the existence or absence
of like products in the market, various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in a reduction in the intangible assets useful life and an acceleration of related
amortization expense.

We assess the impairment of intangible and other long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected
future operating results; (2) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (3) significant negative industry or economic trends.

When we determine that the carrying value of an intangible or other long-lived asset may not be recoverable based upon the existence of
one or more of the above indicators of impairment, we first perform an assessment of the assets recoverability. Recoverability is determined by comparing the carrying amount of an asset against an estimate of the undiscounted future cash flows
expected to result from its use and eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized based on the excess of the carrying amount over the
estimated fair value of the asset.

During the assessment as of December 31, 2010, management did not identify any events
that were indicative of impairment. However, any significant changes in actual future results from the assessment used to perform the quarterly evaluation, such as lower sales, increases in production costs, technological changes or decisions not to
produce or sell products, could result in impairment of these intangible assets at a future date. See additional discussion in Note 2Basis of Presentationuse of estimate in this Report for the potential triggering events of
an impairment.

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Contingencies

We are involved in various legal proceedings, some of which involve claims for substantial amounts. An estimate is made to accrue for a
loss contingency relating to any of these legal proceedings if we determine it is probable that a liability was incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. Because of the subjective nature
inherent in assessing the future outcome of litigation and because of the potential that an adverse outcome in legal proceedings could have a material impact on our financial condition or results of operations, such estimates are considered to be
critical accounting estimates. We have reviewed and determined that at September 30, 2010, there were certain legal proceedings in which we are involved that met the conditions described above. Accordingly, we have accrued a loss contingency
relating to such legal proceedings.

Warrant Accounting

We account for Warrants in accordance with applicable accounting guidance in ASC 815, Derivatives and Hedging, as derivative
liabilities at fair value. Changes in the estimate of fair value are reflected as non-cash charges or credits to other income/expense in our statements of operation as Change in warrant liability. We use a Monte Carlo simulation model to
estimate the fair value of the Warrants at each balance sheet date. This model requires significant highly subjective inputs such as estimated volatility of our common stock and probabilities of potential future issuances of our common stock or
common stock equivalents. Management, with the assistance of an independent valuation firm, makes these subjective determinations based on all available current information; however, as such information changes, so might managements
determinations and such changes could have a material impact of future operating results.

At December 31, 2010, our investment securities included $69.2 million in principal amount of auction rate securities
(ARS) (see Note 7Investment Securities of the Notes to the Consolidated Financial Statements included in this Report for more information regarding the settlement agreement and the proceeds received in connection
therewith). Consistent with our investment policy guidelines, the ARS held by us are AAA-rated securities with long-term nominal maturities secured by student loans which are guaranteed by the U.S. Government. Liquidity for the ARS is typically
provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, typically between seven to 35 days. However, with the liquidity issues experienced in global credit and
capital markets, the ARS experienced failed auctions beginning in February 2008 and throughout fiscal years 2009 and 2010. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of
buyers. The securities for which auctions have failed continue to accrue interest at the contractual rate and continue to be auctioned every seven, 14, 28 or 35 days, as the case may be, until the auction succeeds, the issuer calls the securities,
or they mature.

The annual favorable impact on our net income as a result of a 100 basis point (where 100 basis points equals
1%) increase in short-term interest rates would be approximately $0.3 million based on our average cash and cash equivalents balances at December 31, 2010, compared to an increase of $1.1 million at March 31, 2010.

In May 2003, we issued $200.0 million principal amount of Notes. The interest rate on the Notes is fixed at 2.50% and therefore not
subject to interest rate changes. Beginning May 16, 2006, we became obligated to pay contingent interest at a rate equal to 0.5% per annum during any six-month period, if the average trading price of the Notes per $1,000 principal amount
for the five-trading day period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. We may redeem some or all of the Notes at any time, at a redemption price, payable in cash,
of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of redemption. Holders may require us to repurchase all or a portion of their Notes on May 16, 2013, 2018, 2023
and 2028, or upon a change in control, as defined in the indenture governing the Notes, at 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of repurchase, payable in
cash. If an event of default is deemed to have occurred on the Notes, the principal amount plus any accrued and unpaid interest on the Notes could also become immediately due and payable. Because the next date holders may require us to repurchase
all or a portion of their Notes is May 16, 2013, the Notes were classified as a long-term liability as of December 31, 2010. The Notes are subordinate to all of our existing and future senior obligations.

55

In March 2006, we entered into a $43.0 million mortgage loan secured by four of our
buildings that matures in April 2021. The interest rate on this loan is fixed at 5.91% per annum (and a default rate of 10.905% per annum) and not subject to market interest rate changes.

Item 4.

Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

An evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer (the CEO) and Chief Financial Officer (the
CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. As a result of the material weaknesses in our internal control over financial reporting described below, our
CEO and CFO have concluded that our disclosure controls and procedures were not effective as of December 31, 2010.

As
described in Item 9AControls and Procedures of our 2010 Form 10-K, management determined that the following material weaknesses existed in our internal control over financial reporting. As of December 31, 2010, these
material weaknesses have not been remediated.

Material weakness in entity-level controls.We did not maintain an
effective control environment or entity-level controls with respect to the risk assessment, information and communications and monitoring components of internal control. We did not:

a.

promote an appropriate level of control awareness;

b.

maintain a sufficient complement of adequately trained personnel with an appropriate level of knowledge, experience and training in the application of U.S. GAAP
commensurate with our financial reporting requirements; and

c.

design adequate controls to identify and address risks critical to financial reporting, including monitoring controls and controls to ensure remediation of identified
deficiencies.

Such deficiencies resulted in a reasonable possibility that a material misstatement of our annual
or interim consolidated financial statements will not be prevented or detected on a timely basis and contributed to the other material weaknesses described below.

Material weakness surrounding financial statement preparation and review procedures and application of accounting principles. Our policies and procedures did not adequately address the
financial reporting risks associated with the preparation and review of our financial statements. We did not:

design controls over access, changes to and review of our spreadsheets used in the preparation of financial statements;

e.

design controls necessary to ensure that information for new and modified agreements was identified and communicated to those responsible for evaluating the accounting
implications;

f.

develop policies and procedures necessary to adequately address the financial reporting risks associated with the application of certain accounting principles and
standards (which, in one circumstance, resulted in the need to restate previously issued financial statements); and

g.

design controls necessary to ensure that accurate information related to the calculation of Medicaid rebates, including information related to pricing of products and
the exempt status of customers, was captured and communicated to those responsible for evaluating the accounting implications.

Such deficiencies resulted in a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Remediation Activities

Beginning in the fourth quarter of fiscal year 2009 and continuing through fiscal year 2011, we began designing and implementing controls, in order to remediate the material weaknesses described above in
(a) Managements Report on Internal Control Over Financial Reporting. We expect that our remediation efforts, including design, implementation and

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testing will continue throughout fiscal year 2011 and fiscal year 2012. Our efforts to date and the remaining amount of time we believe is needed to remediate our material weaknesses has been
impacted by, amongst other things, significant reductions in our workforce and changes in personnel since the fourth quarter of fiscal year 2009, managements focus on multiple priorities including obtaining financing, returning our products to
market and becoming current with our Securities and Exchange Commission (SEC) filings. While unremediated, these material weaknesses have the potential to result in our failure to prevent or detect material misstatements in our annual or
interim consolidated financial statements. We will continue our remediation efforts described below and we plan to provide an update on the status of our remediation activities with future reports to be issued on Form 10-Q and Form 10-K.

As previously disclosed, in August 2008, the Audit Committee, with the assistance of legal counsel, including FDA regulatory counsel with
respect to FDA matters, and other advisers, conducted an internal investigation with respect to a range of specific allegations involving, among other items, FDA regulatory and other compliance matters and management misconduct. The investigation
was substantially completed in December 2008 and the investigation of all remaining matters was completed in June 2009.

The
investigation focused on, among other areas, FDA and other healthcare regulatory and compliance matters, financial analysis and reporting, employment and labor issues, and corporate governance and oversight. As a result of its findings from the
investigation, the Audit Committee, with the assistance of its legal counsel, including FDA regulatory counsel with respect to FDA matters, and other advisors, prepared and approved a remedial framework, which was previously disclosed in the Form
10-K for fiscal year 2009. Some of the measures included in the remedial framework are intended to remediate certain material weaknesses and are listed below.

Since the quarter ended March 31, 2009, the following actions have been taken and management believes that implementation is substantially complete with respect to the following actions to remediate
the material weaknesses listed above:

1.

Expanded the membership of our disclosure committee to include executives with responsibilities over our operating divisions and regulatory affairs; and reviewing,
revising and updating existing corporate governance policies and procedures.

2.

Reorganized and relocated our legal department adjacent to the Chief Executive Officers office to facilitate greater access to the legal department and more
extensive involvement of the legal department in corporate governance and compliance matters.

retained outside consultants and counsel for FDA regulatory matters and, with their assistance, reviewing and revising our policies, procedures and
practices to enhance compliance with the FDAs current good manufacturing practice requirements;

evaluated compliance with applicable foreign laws and regulations; and



implemented internal reporting policies pursuant to which our chief compliance officer will report periodically to the non-management members of the
Board.

4.

Defined and documented roles and responsibilities within the financial statement closing process including required reviews and approval of account reconciliations,
journal entries and methodologies used to analyze account balances.

Identified and implemented steps to improve communication, coordination and oversight with respect to the application of critical accounting policies and the
determination of estimates.

7.

Identified and implemented steps to improve information flow between the Finance department and other functional areas within our Company to ensure that information
that could affect the financial statements is considered.

8.

Defined specific roles and responsibilities within the Finance department to improve accounting research and implementation of accounting policies.

9.

Implemented processes and procedures to (1) identify and assess whether certain entities are appropriately exempt from the Medicaid best price calculation and
(2) evaluate Public Health Service (PHS) pricing requests.

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10.

Hired a Corporate Controller and Director of Financial Reporting with expertise in controls over financial reporting, financial statement closing procedures and U.S.
GAAP.

Management believes it is making progress and is continuing to proactively implement the following
measures and actions in order to remediate the material weaknesses listed above:

1.

Establish a monthly business review process to ensure an in-depth senior management review of business segment results on a timely basis.

2.

Develop and document comprehensive accounting policies and procedures, including documentation of the methods for applying accounting policies through detailed process
maps and procedural narratives.

3.

Identify and implement specific steps to improve information flow between the Finance department and other functional areas to ensure that information that could affect
the financial statements, including the effects of all material agreements, is identified, communicated and addressed on a timely basis.

4.

Implement adherence to and deadline compliance with pre-established month-end, quarter-end and year-end closing schedules and closing checklists to ensure timely and
documented completion of the financial statements.

5.

Develop and implement a policy and procedure to control the access, modification and review processes for spreadsheets that are used in the preparation of our financial
statements and other disclosures.

6.

Conduct further training and education of the Finance department personnel on critical accounting policies and procedures, including account reconciliations and
financial statement closing procedures, to develop and maintain an appropriate level of skills for proper identification and application of accounting principles.

7.

Conduct training and education for personnel outside the Finance department on critical accounting policies and procedures to improve the level of control awareness at
our Company and to ensure an appropriate level of understanding of the proper application of accounting principles that are critical to our financial reporting.

8.

Establish periodic meetings between the contracting functions and the Finance department to improve communication regarding the evaluation and reporting of PHS pricing
requests and related matters.

(b)

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the quarter ended
December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

The
information set forth under Note 16Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Report is incorporated in this Part II, Item 1 by reference.

Item 1A.

RISK FACTORS

In light of
recent developments at our Company, we have elected to restate in its entirety, the Risk Factors section previously reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following risk
factors could have a material adverse effect on our business, financial position, results of operations or cash flows. These risk factors may not include all of the important risks that could affect our business or our industry, that could cause our
future financial results to differ materially from historic or expected results, or that could cause the market price of our common stock to fluctuate or decline. Because of these and other factors, past financial performance should not be
considered an indication of future performance.

There is substantial doubt about our ability to continue as a going concern.

There is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements in this
Report were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The
historical consolidated financial statements included in this Report do not include any adjustments that might be necessary if we are unable to continue as a going concern.

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The assessment of our ability to continue as a going concern was made
by management considering, among other factors: (i) the timing and number of additional approved products that will be reintroduced to the market and the related costs; (ii) the suspension of shipment of all products manufactured by us and
the requirements under the consent decree with the FDA; (iii) the possibility that we may need to obtain additional capital despite the senior secured loan we obtained in November 2010, as amended in January 2011 and March 2011, and which was
repaid with proceeds from the offering of the 2011 Notes in March 2011, and the proceeds from the private placement of our Class A Common Stock completed in February 2011; (iv) the potential outcome with respect to the governmental
inquiries, litigation or other matters described in Note 16Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in this Report; and (v) our ability to comply with debt covenants. Our
assessment was further affected by our fiscal year 2010 net loss of $283.6 million, our net loss of $116.9 million for the nine months ended December 31, 2010 and the outstanding balance of cash and cash equivalents of $31.7 million and $60.7
million as of December 31, 2010 and March 31, 2010, respectively. For periods subsequent to December 31, 2010, we expect losses to continue because we are unable to generate any significant revenues from more of our own manufactured
products until we are able to resume shipping more of our approved products and until after we are able to generate significant sales of Makena® which was approved by the FDA in February 2011. We received notification from the FDA on September 8, 2010 of approval to ship into the marketplace the first
product approved under the consent decree, i.e., Potassium Chloride ER Capsule. We resumed shipment of our Potassium Chloride ER Capsule Micro-K® 10mEq and Micro-K® 8mEq
products in September 2010. We are continuing to prepare other products for FDA inspection and do not expect to resume shipping other products until sometime in fiscal year-end 2012, at the earliest. In addition, we must meet ongoing operating costs
as well as costs related to the steps we are currently taking to prepare for reintroducing other approved products to the market. If we are not able to obtain the FDAs clearance to resume manufacturing and distribution of many of our approved
products in a timely manner and at a reasonable cost, or if revenues from the sale of Makena® prove to be
insufficient, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to continue as a going concern.

Based on current financial projections, we believe the continuation of our Company as a going concern is primarily
dependent on our ability to address, among other factors: (i) the successful launch and market acceptance of
Makena® at prices meeting the Companys future needs and expectations; (ii) the timing, number and
revenue generation of approved products that will be introduced or reintroduced to the market and the related costs; (iii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA
(other than the Potassium Chloride ER Capsule, including Micro-K® 10mEq and Micro-K® 8mEq, products that are the subject of the FDA notification letter discussed above); (iv) the possibility that
we will need to obtain additional capital despite the senior secured loan we were able to obtain in November 2010, as amended in January 2011 and March 2011, and which was repaid with proceeds from the offering of the 2011 Notes in March 2011, and
the proceeds from the private placement of our Class A Common Stock completed in February 2011; (v) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16Commitments
and Contingencies of the Notes to the Consolidated Financial Statements included in this Report; (vi) our ability to comply with the conditions set forth in a letter received approving certain waivers of covenants under our mortgage loan
agreement, as more fully described in Item 2Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources of this Report; and (vii) compliance with other
debt covenants. While we address these matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with introducing or reintroducing approved products to the market (such
as costs related to our employees, facilities and FDA compliance), remaining milestone payments associated with the acquisition of the rights to Makena® (see Note 5Acquisitions of the Notes to the Consolidated Financial Statements included in this Report), the financial obligations pursuant to
the plea agreement (see Note 1Description of BusinessPlea Agreement with the U.S. Department of Justice of the Notes to the Consolidated Financial Statements included in this Report), costs associated with our legal counsel
and consultant fees, as well as the significant costs, such as legal and consulting fees, associated with the steps taken by us in connection with the consent decree and the litigation and governmental inquiries. If we are not able to obtain the
FDAs clearance to resume manufacturing and distribution of certain or many of our approved products in a timely manner and at a reasonable cost and/or if we experience adverse outcomes with respect to any of the governmental inquiries or
litigation described in Note 16Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in this Report, our financial position, results of operations, cash flows and liquidity will continue to be
materially adversely affected.

In the near term, we are focused on performing the following: (i) the
commercial launch of Makena®; (ii) meeting the requirements of the consent decree, which will allow our
approved products (other than the Potassium Chloride ER Capsule, including Micro-K® 10mEq and Micro-K® 8mEq, products that are the subject of the FDA notification letter discussed above) to be reintroduced to the
market; (iii) evaluating strategic alternatives with respect to Nesher; and (iv) pursuing various means to minimize operating costs and increase cash. Since December 31, 2010, the Company has generated non-recurring cash proceeds to
support its on-going operating and compliance requirements from a $32,300 private placement of Class A

59

Common Stock in February 2011 and a $225,000 private debt placement (see Note 18Subsequent Events of the Notes to the Consolidated Financial Statements included in this Report)
in March 2011 (a portion of which was used to repay all existing obligations under the agreement with U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C.)(see Note 12Long-Term Debt of the Notes to the Consolidated Financial
Statements included in this Report for description of U.S. Healthcare I, L.L.C and U.S. Healthcare II, L.L.C loan). While the cash proceeds received to date were sufficient to meet near-term cash requirements, we are pursuing ongoing efforts to
increase cash, including the continued implementation of cost savings, exploration of strategic alternatives with respect to Nesher and the assets and operations of our generic products business and other assets, the return of certain of additional
approved products to market in a timely. We cannot provide assurance that we will be able to realize additional cost reductions from reducing our operations, that some or many of our approved products can be returned to the market in a timely manner
(other than the Potassium Chloride ER Capsule, including Micro-K® 10mEq and Micro-K® 8mEq, products that are the subject of the FDA notification letter discussed above), that our higher profit approved
products will return to the market in the near term or that we can obtain additional cash through asset sales, the successful commercial launch of Makena®, or the issuance of equity. If we are unsuccessful in our efforts to return our products to market, or to sell assets or raise additional capital in the near term, we
will be required to further reduce our operations, including further reductions of our employee base, or we may be required to cease certain or all of our operations in order to offset the lack of available funding.

We continue to evaluate the sale of certain of our assets, including Nesher. To date, we have received several initial offers for Nesher.
However, the offers received to date have been below the Companys expectations with regards to total value. The Company is continuing to work with its advisers and all interested parties to complete a transaction. However, due to general
economic conditions, we will likely be exposed to risks related to the overall macro-economic environment, including a lower rate of return than we have historically experienced on our invested assets and being limited in our ability to sell assets.
In addition, we cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of such assets. Even if we are able to find purchasers, we may not be able to obtain attractive terms and conditions for such sales,
including attractive pricing. In addition, divestitures of businesses involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues
and earnings associated with the divested business, and the disruption of operations in the affected business. In addition, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure of
significant financial and employee resources. Inability to consummate identified asset sales or manage the post-separation transition arrangements could adversely affect our business, financial condition, results of operations and cash flows.

Our future business success in the next several years, as well as the continued operation of our Company, depends
critically upon our successful market launch of Makena® and our ability to achieve revenues from the sale of
Makena® consistent with our business expectations. A failure to achieve these objectives and sufficient market
success in selling Makena® will materially adversely affect the success and viability of our Company and would
likely result in a default under our debt obligations.

As previously disclosed, under our agreement
with Hologic, we completed the acquisition of Makena® upon making a $12.5 million additional payment to Hologic
on February 10, 2011 and are currently undertaking the commercial launch of Makena®. Under our agreement with Hologic, we must make subsequent additional milestone payments and our payment
obligations are secured by a lien on our rights to Makena® granted to Hologic. We have certain revenue expectations with respect to both the sale of Makena® as well as the sales of our
approved products that are allowed to return to the market by FDA following successful inspections under the consent decree. If we cannot timely and successfully commercially launch Makena® and achieve those revenue expectations with respect to Makena®, this would result in
material adverse impact on our results of operations and liquidity, and ability to continue as a going concern.

Moreover, if we fail to pay to Hologic any of the remaining payments when they mature under our agreement, as amended, with Hologic, our rights to the Makena® assets will transfer back to Hologic.

As discussed in Note 5Acquisitions of the Notes to the Consolidated Financial Statements included
in this Report, we modified the Original Makena® Agreement pursuant to an amendment entered into in January
2010. Pursuant to the Makena® Amendment, we made a $70 million cash payment to Hologic upon execution of the
Makena® Amendment in January 2010. We entered into a Second Amendment to the Original Makena® Agreement on February 4, 2011. Under the Original Makena® Agreement, as amended, after the $12.5 million payment we made to Hologic on February 10, 2011, we are required to pay a series of additional future scheduled
cash payments in the aggregate amount of $107.5 million upon successful completion of agreed upon milestones. We also may become obligated t